Jul222013
Coastal California housing markets will hit affordability ceiling first
Over the last 40 years, California inflated three different housing bubbles. Starting in the 1970s with regulations like CEQA, California began to restrict growth. This inhibited builders and developers from bringing new product to market to meet demand in many areas. As a result, demand pressures caused prices to rise. Rather than react to rising prices as a deterrent to buying, the sudden upward price movements served as a catalyst for even more buying as homeowners became speculators hoping to cash in on rapid appreciation.
As with all financial manias where asset values become detached from fundamentals, the first three housing bubbles all resulted in housing busts with each one being more severe than the last. As a result of the most recent horrendous crash in housing values, government regulators stepped in and put new rules in place designed to prevent future housing bubbles from inflating. (See: New mortgage regulations will prevent future housing bubbles) For as cynical as I am about the ability of regulators to get anything right, the rules put in place, if enforced, will do much to prevent future housing bubbles.
The housing bubble of the 1970s was inflated because lenders abandoned long-held standards for debt-to-income ratios. Prior to the housing bubble of the 1970s, lenders would only allow a front-end ratio (the percentage of income directly attributable to housing costs) of 28%. Further, lenders would only permit a back-end ratio (total debt service as a percentage of income) of 36%. These standards were completely abandoned during the 1970s because lenders reasoned that with 10% yearly wage inflation, a borrower’s onerous front-end ratio in the early years would become affordable after a few years of steadily rising wages. Of course, they were wrong.
The housing bubble of the late 80s and early 90s was inflated by lenders who again allowed debt-to-income ratios get out of control, and they experimented with “innovative” loan programs such as interest-only and negative amortization. And the latest housing bubble was inflated by the proliferation of those same toxic loan programs.
The common denominator behind the previous housing bubbles was an abandonment of affordable debt-to-income ratios and the use of loan products that don’t amortize. Shockingly enough, regulators figured this out, and the new qualified mortgage rules specifically ban interest-only and negatively-amortizing loans. Further, these rules but a cap on debt-to-income ratios of 43%. This effectively eliminates the primary tools lenders have to inflate housing bubbles.
Affordability Ceiling
Lenders don’t set out to inflate housing bubbles. The pressures on lenders to obtain business prompts them to expand loan programs and develop “innovative” loan products in order to keep sales volumes up when prices reach the limit of affordability. Sellers could always rely on lenders to arm borrowers with dangerous loans to finance ever-higher asking prices. That will not be the case in the future.
The result of the new regulations will be a much more rigid ceiling on affordability. Borrowers will be required to document their income, and that income will be applied to amortizing loans with a reasonable debt-to-income ratio. They can either afford the property or they can’t. Their bids will be limited.
If borrowers don’t have the ability to raise their bids due to limits on financing, then future housing markets will be very interest rate sensitive. Rising interest rates will lower the affordability ceiling if salaries don’t rise to compensate.
My monthly housing market reports still show most markets even in Orange County as being undervalued. That’s the impact of super low interest rates on the affordability ceiling. Many sub-markets in Orange County are very near the affordability ceiling, and as that ceiling falls, some of these markets may be exposed as burgeoning housing bubbles.
Rising Mortgage Rates Pull Back The Curtain On Emerging Local Bubbles
Posted by: Stan Humphries — July 17, 2013
As mortgage interest rates climb, the local bubbles that have quietly been inflating in a number of markets will reveal themselves.
Imagine global warming raises sea levels so high that all the land is underwater (remember the movie Waterworld?). This is analogous to lenders who created so much housing debt they put all homeowners underwater. Now imagine rising interest rates are like falling sea levels. Beneath the surface, volcanic islands may still be growing and plate tectonics is still raising mountains just like our efforts to reflate the housing bubble is raising values in some markets more than others.
Interest rates are a blunt instrument. Lenders can’t charge one rate in Coastal California that doesn’t need stimulus and another in Las Vegas that does. Interest rates will raise or lower the affordability ceiling everywhere, just like global warming raises sea levels everywhere. As the sea levels recede (interest rates rise), the areas nearest the surface will poke above the water and become islands. These islands will represent exposed housing bubbles.
Perhaps wave action and erosion will knock these islands down and prevent them from reaching the sky, but as long as the interest rate stimulus is being applied, and as long as inventory is overly restricted, there is always the danger of inflating an echo bubble.
Between 1985 and 2000, the monthly mortgage payment on a typical American home (after 20 percent down) represented about 20 percent of monthly median household incomes. By the end of 2012, that had fallen to roughly 12.6 percent. Thanks largely to a combination of a big dip in home prices during the recession and historically low mortgage rates, Americans were spending 37 percent less of their monthly salaries on mortgages at the end of last year.
That is the basis for a durable economic recovery.
But recently, mortgage rates briefly crossed the 4 percent threshold, and are expected to continue to rise, slowly but steadily. So we set out to discover those areas in which affordability will be most affected once mortgage rates hit 5 percent, 6 percent and 7.1 percent. The 7.1 percent threshold is the point at which homebuyers nationwide will be back to spending 20 percent of their monthly incomes on a mortgage payment.
This is a good analysis. Rising interest rates won’t pummel the national housing market. Houses are still very affordable. The impact will be seen first in the most inflated markets.
At current mortgage rates, on a monthly payment basis, the U.S. as a whole and all of the top 30 largest metro markets covered by Zillow are more affordable today relative to their historic norms.
But at 5 percent mortgage interest rates and assuming homes in these metros appreciate in line with Zillow’s Q1 2013 home value forecasts, homes in half a dozen markets will look more expensive than their historic norms on a monthly payment basis: San Jose, Calif. (22 percent more expensive); Los Angeles (19 percent more expensive); San Diego (14 percent more expensive); San Francisco (11 percent more expensive); Portland, Ore. (7 percent more expensive); and Denver (1 percent more expensive).
That covers over 90% of the readers of this blog.
At 6 percent, five more major markets become more expensive: Riverside, Calif. (11 percent more expensive); Miami (7 percent more expensive); Seattle (5 percent more expensive); Sacramento (4 percent more expensive); and Washington, D.C. (2 percent more expensive). And, logically, the six markets that were more expensive at 5 percent only look even pricier at 6 percent. In San Jose, for example, at 6 percent mortgage interest rates, homeowners can expect to pay 36 percent more of their monthly salaries on mortgage payments than they were paying between 1985 and 2000.
As interest rates rise, if wages don’t rise with them, the affordability ceiling will put pressure on house prices. Buyers today expect this rally to continue until prices double again. It’s entirely possible that rising interest rates will cause the best markets to pull back while the weaker ones catch up. That’s what the analysis at Fitch Ratings believes, and I concur with their analysis.
At 7.1 percent mortgage rates, the point at which homeowners in the U.S. as a whole are back to spending their monthly historic average on mortgages, homes in another 7 large metros fall into the more expensive bin: Phoenix (13 percent more expensive); Boston (10 percent more expensive); Philadelphia (9 percent more expensive); New York (7 percent more expensive); Baltimore (6 percent more expensive); Pittsburgh (5 percent more expensive); and Charlotte (2 percent more expensive).
Yes, rates will remain very low for at least the time being. But it won’t be long before they climb back to 5 percent. Consider some historical context: The average 30-year fixed rate mortgage rate over the past 42 years is roughly 8.5 percent, according to Freddie Mac. In other words, rates of 5 percent or 6 percent should still be considered bargains, historically speaking.
And when (not if) they reach that point again, we’re likely to see price volatility, as consumers are forced to either spend more of their incomes to buy ever more expensive homes; or home value appreciation will stagnate or fall while waiting for incomes to catch up.
Since the new qualified mortgage rules ban debt-to-income ratios over a certain threshold, consumers won’t be given the option to spend more of their incomes on houses; therefore, home price appreciation will stagnate or fall for a while while incomes catch up.
The folly of Coastal California cashflow investing
I pointed out last week that Orange County real estate has rarely been cashflow positive. In 2006, it certainly wasn’t. Today’s featured REO was purchased as a cashflow property; however, since the loan was so large, the property was not cashflow positive, and the combination of declining values and negative cashflow wiped the former owner out.
He paid $5,150,000 using a $3,347,500 first mortgage, a $400,000 second mortgage, and a $1,402,500 down payment — all lost… or was it?
The first NOD was filed in September of 2009, so the borrower wasn’t making payments at least three months prior to that. The property was finally sold at auction on 5/21/2013 about four years after. Did the owner make any payments during that time, or did he skim rents from this property to recoup is down payment?
[raw_html_snippet id=”newsletter”]
[idx-listing mlsnumber=”OC13141648″ showpricehistory=”true”]
227 CARNATION Ave Corona Del Mar, CA 92625
$3,700,000 …….. Asking Price
$5,150,000 ………. Purchase Price
3/23/2006 ………. Purchase Date
($1,450,000) ………. Gross Gain (Loss)
($296,000) ………… Commissions and Costs at 8%
============================================
($1,746,000) ………. Net Gain (Loss)
============================================
-28.2% ………. Gross Percent Change
-33.9% ………. Net Percent Change
-4.4% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$3,700,000 …….. Asking Price
$740,000 ………… 20% Down Conventional
4.87% …………. Mortgage Interest Rate
30 ……………… Number of Years
$2,960,000 …….. Mortgage
$759,990 ………. Income Requirement
$15,656 ………… Monthly Mortgage Payment
$3,207 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$771 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$19,633 ………. Monthly Cash Outlays
($2,803) ………. Tax Savings
($3,643) ………. Principal Amortization
$1,385 ………….. Opportunity Cost of Down Payment
$945 ………….. Maintenance and Replacement Reserves
============================================
$15,518 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$38,500 ………… Furnishing and Move-In Costs at 1% + $1,500
$38,500 ………… Closing Costs at 1% + $1,500
$29,600 ………… Interest Points at 1%
$740,000 ………… Down Payment
============================================
$846,600 ………. Total Cash Costs
$237,800 ………. Emergency Cash Reserves
============================================
$1,084,400 ………. Total Savings Needed
[raw_html_snippet id=”property”]
Each housing price spike has a different reason, and the regulators always fix the last one. This time, the price spike is from the Fed’s money printing operations that have pushed bank reserves to eye popping highs. This should be very inflationary. Unfortunately, the new mortgage regulations will curtail the middle class from participating in the inflationary housing price spike.
Many Wall Street careers have been cut short by going against the Fed. Now that the Fed has set it’s sights on pumping up housing markets, I would not bet against a sustained price move upward. And, when the Fed decides to stop, most likely because of inflation, prices will spiral downward. So, you can bet on steep upward price moves, then another drop after the Fed pulls back. Your only defense is quality properties. If you study history, you will find that well located smaller homes not far from the beach with good sized lots and no traffic held most of their gains during the price drops. That is why I focus on these. I added one more than 1 month ago, and I am hunting for another. Finding deals is more difficult than ever.
The main reason these properties held their gains during the price drop is because banks refused to foreclose on them. Look at today’s featured property. A prime location rental complex, and the owner was allowed to squat and skim rent for four years. It’s even worse in NYC where foreclosures have been almost non-existent despite high delinquency rates.
Because banks are hesitant to foreclose on prime properties, these values do tend to be less volatile, and that has value, but I’ll take the cashflow properties in beaten down markets any day over the less volatile prime properties. If you buy when cashflow is good, you can sell with volatility shoots the prices straight upward, or you can hold for ongoing cashflow.
Dude, the 10yr USTbond is essentially priced in to your financial model.
Happy hunting.
Higher rates will have greater impact on today’s market than ever before.
The author seems to think it’s just a matter of “how much more the buyer will pay out of his income.”
But that is just one factor.
Keep in mind, this market is driven by investors. If the investor share decreases, prices will either stagnate of fall.
Investor margins are hurt by rising prices, higher rates and depleted inventory.
So, forget about incomes. That is irrelevant for now.
When the investors pack it in, sales will fall, prices will follow and the game will be over.
I suppose the fed could buy more MBS, but I wouldn’t bet the farm on it.
Investors will form a floor under prices. They won’t pull out and let prices fall because lower prices would provide enticing returns. If prices began to fall, investor activity would pick up again — assuming interest rates remain relatively low. If interest rates rise, and if competing investments become more enticing, investors will bail on housing, and they won’t step in and buy more if prices fall.
We have inflation setting in for food and fuel. I just wonder if Fed has even thought about the possibility of high unemployment and high inflation? This high inflation might require tapering of QE even though the Fed will try to keep it for a longer period. The academics didn’t foresee this as possibility of occurring.
Shocking, the academics didn’t foresee this. =)
That was my thought too. With stagnant wages and high unemployment, we could easily see a repeat of the 1970s stagflation.
As incomes increase home prices also increase because housing costs are typically calculated as a percent of monthly income. The old standard for the amount of income that a family can spend on housing is 30 percent, in order to have enough left over for other non-discretionary spending. A household spending more than 30 percent of their income on housing is considered to be burdened, or “house poor”. But this amount is arbitrary, just as any fixed percentage of income devoted to any other monthly expenditure would be, and it distorts prices. The amount has a long history and comes from lending standards for assessing loan risk. It’s an underwriting standard. In some markets, lending standards drive prices, but have no relation to real value.
“The old standard for the amount of income that a family can spend on housing is 30 percent, in order to have enough left over for other non-discretionary spending.”
With wages not growing and prices increasing I just wonder if that 30% calculation is still valid. There is 10 years of little of no wage growth, but 10 years of price increases. Without wage growth maybe DTI needs to lower? It’s a question I have been asking myself.
Lower DTI can only be good for individuals. For lenders, not so much.
And speaking of spending within your means, over the last several months, I’ve seen many homes in the 500k-700k range. Not exactly the low end. Many of these homes are occupied by house poor people. People who must have stretched to the max in order to buy. The homes are dilapidated, outdated, disheveled, and clearly, the occupants have put all their hopes on some imagined, automatic appreciation. As inflation rises all around them, and wages stay the same, things can only get worse. Unless they sell. Which they should in this market. At $450 sq/ft, who wouldn’t?
I’ve noticed a bunch of these listings in Quail Hill. 2/2 1,100 SF condos for $550,000+.
I’ll take my monthly rent of $2,000 for my 2/2 1100SF apartment in Woodbury over the debt slavery that comes with owning these types of condos in Quail Hill. Oh, and I get to enjoy the same community amenities as my local loanowners do. 🙂
$2,000 to rent with no risk, or $3,500 to own with fantasy appreciation and risk of decline. Hmmm… I think I would take your side of that trade too.
Lawrence Yun now an OC Housing News reader
Existing home sales dip monthly but rise 15.2% annually
By Megan Hopkins July 22, 2013 • 9:06am
Existing-home sales fell in June, but have stayed well above year-ago levels for the past two years. For seven consecutive months, the median price saw double-digit year-over-year increases, according to the National Association of Realtors.
Total existing-home sales — completed transactions involving single-family homes, townhomes, condominiums and co-ops — dropped 1.2% to a seasonally adjusted annual rate of 5.08 million in June from a downwardly revised 5.14 million in May. However, sales are 15.2% higher than the 4.41 million units reached in June 2012.
NAR Chief Economist Lawrence Yun said there is enough momentum in the market, even with higher interest rates. “Affordability conditions remain favorable in most of the country, and we’re still dealing with a large pent-up demand,” he said. “However, higher mortgage interest rates will bite into high-cost regions of California, Hawaii and the New York City metro area market.”
Diana Olick @diana_olick 27s
June existing home sales disappoint, -1.2%mm, as investors drop to just 15% of buyers, lowest since 10/08 @REALTORS
Government Intervention Drives Down Distressed Sales in California
Distressed property sales have declined drastically in California over the last year, according to a recent report from PropertyRadar.
In June, sales for distressed homes and condominiums plunged 46.5 percent year-over-year in June. On the other hand, non-distressed property sales shot up by 31.3 percent during the same time period.
Government intervention is the main driving force behind the declines in distressed property sales, according to the report authored by Madeline Schnapp, director of economics research at the firm.
For example, PropertyRadar reported California foreclosure sales totaled 2,159 in June, representing a 14.1 percent decrease from May and a 63.6 percent decline
from a year ago. The total for June is also the lowest level for foreclosure sales since January 2007.
The recent drop, according to the firm, is partly a result of guidance from the Office of the Comptroller of the Currency (OCC), which established minimum standards for handling borrower files subject to a foreclosure sale within 60 days.
“As a result of the letter, several of the largest banks – Bank of America, Citi, JP Morgan and Wells Fargo Bank – either slowed or stopped their foreclosure sales in May,” the report stated.
However, the firm says it appears the large have resumed foreclosure sales in the state, which means foreclosure sales are likely to pick back up again in July.
Even though distressed sales are way down, PropertyRadar noted they still account for 30 percent of total sales, which is three times historic averages. Though, a year ago, distressed sales accounted for 50.5 percent of sales.
Meanwhile, Notices of Default (NODs), which mark the first step in the foreclosure process in the state, fell 15.1 percent from May and 60.3 percent from a year ago to 8,317.
The report also revealed that out of 6.9 million homeowners with a mortgage in the state, 2 million are underwater.
Existing home sales dropped 1.2% month-over-month – the biggest drop in 2013 – against expectations for a 1.5% rise. Critically though, this is for a period that reflects closings with mortgage rates from the April/May period – before the spike in rates really accelerated.
Inventory rose once again to 5.2 months of supply (vs 5.0 in May) and you know the realtors are starting to get concerned when even the ever-optimistic chief economist of the NAR is forced to admit that ‘stunningly’ “higher mortgage rates will bite.” With mortage applications having collapsed since May, we can only imagine the state of home sales (especially as we see all-cash buyers falling) for July.
http://www.zerohedge.com/news/2013-07-22/existing-home-sales-fall-most-2013-biggest-miss-12-months
It will interesting to see the August report when it will be mostly June/July sales.
Critically though, this is for a period that reflects THE HEIGHT OF THE SUMMER SELLING SEASON!
That’s the same thing we saw in 2011 when prices took a real dive. The May numbers in 2011 showed both a month-over-month and a year-over-year decline during the peak selling season. We will either see very low sales volumes or lower prices this fall and winter. With the nature of cloud inventory, I would guess lower sales volumes are more likely.
IR
You will find it interesting that for the last week I have gotten unsolicited mail asking me to sell. Letters are from realtors, investors and investment companies asking to sell to them with
No contingencies
they wave most closing costs
No commissions
Quick close.
So these people are now targeting regular home owners without distressed properties. Yet everyone thinks its all going great. I received 5 letters within two weeks.
If your property is in an area they’ve targeted for acquisition, they just want it. They aren’t willing to wait for these to come to market, particularly as prices rise and their window of opportunity is closing.
“Further, these rules but a cap on debt-to-income ratios of 43%.”
I wonder how the proliferation of zero interest car loans will affect purchasing power since the 43% DTI includes: principal and interest, escrow deposits for taxes, hazard insurance, mortgage insurance premium, homeowners’ dues, etc.; and all recurring monthly revolving and installment debt (car loans, personal loans, student loans, credit cards, etc.).
This is the back-end ratio. I can’t seem to find anything about the qualified mortgage front-end ratio. Anyone know what it is going to be under the qualified mortgage rules? The front-end ratio has typically been 28 (conventional) or 31 (FHA) or even 41 (VA). Does QM even address this? And if not, is the default permissible front-end ratio 43%?
I think the total cap of 43% would allow a front-end ratio that high for borrowers with no other debts. It’s a loophole that may allow some buyers to bid up prices. Houses will end up in the hands of those with the least consumer debt if that’s the case.
That’s kind of the way I read it as well. If this is true, I wonder how this will affect consumer behavior regarding high-dollar financed purchases in the long term. I would think that first-time buyers might not buy that new car, boat, etc since it will impact their ability to get a home loan. And once they have the mortgage loan at 43% DTI will they have the financial ability to finance a major purchase? It’s almost like the mortgage industry “legislated” a 12% marketshare expansion via Dodd-Frank, going from 31% to 43% DTI. How did the auto/student loan lobby allow this to happen?
Does this also greatly expand the amount that FHA, Fannie and Freddie will loan without manual underwriting? Instead of 28 or 31 percent, we are at 43 percent front-end DTI on Jan 1, 2014?
I have to rent out my existing before a purchase a new home. Or do I have to find a tenant, contract, and canceled check on my existing place so it won’t count against me.
Don’t you have to have at least 6 months rental history on an investment property for one to be able to count the rental as income?
In the past, you did not need 6 months of rental history. You just needed to show a signed lease to get 80% of the rental as income.
Mortgage rates now a buyer stumbling block
CHICAGO (MarketWatch)—Mortgage rates used to be the least of home buyers’ worries. But a recent interest-rate spike is turning the factor of rising home-loan rates into a widespread concern.
Rates on 30-year fixed-rate mortgages averaged 4.37% for the week ending July 18, according to Freddie Mac’s weekly survey of conforming mortgage rates. That’s down slightly from the average a week earlier, but up more than a percentage point from early May.
While it isn’t yet known how the rate increase may have affected overall housing sales, the volatility has been a reality check, a reminder to would-be buyers that low rates won’t be around forever, said Jessica Edwards, Coldwell Banker Real Estate consumer specialist.
It’s causing others to back out of deals in progress.
Getty Images Volatile mortgage rates have generated anxiety among would-be buyers, causing some to back out of deals in progress.
For example, two of Ellie McIntire’s short-sale transactions have fallen through the past couple of weeks. The Baltimore-area real-estate agent, who specializes in short sales, said that rising rates are to blame.
In a short sale, the sellers owe more on the mortgage than the home is currently worth, and their lender agrees to accept less than the full mortgage payoff at closing. In McIntire’s cases, after waiting for at least 60 days for the banks to accept or reject their offers, the buyers decided they couldn’t afford to wait any longer and pulled out of the process, she said. Without an agreed upon contract price, they couldn’t secure financing.
“They had gotten to the 4% [30-year fixed-rate mortgage rate] mark and decided they wanted to find a home that was a standard transaction,” not a short sale, McIntire said. With a traditional sale, the home seller approves the offer, not the bank, so the process can move more quickly.
Forty-one percent of home buyers said rising mortgage rates were their No. 1 worry, according to a survey of more than 2,000 people conducted in late June by real-estate website Trulia.
Of the respondents who plan to buy a home someday, 13% said a mortgage rate of 4% would be too high and 20% said a mortgage rate of 5% was their limit. Another 22% said rates would have to reach 6% to discourage them from buying a home
IR, great analogy: “As the sea levels recede (interest rates rise), the areas nearest the surface will poke above the water and become islands. These islands will represent exposed housing bubbles.”
Let’s keep in mind – this applies the economy in general. Bubbles/malinvestment abound. ZIRP guarantees it. When the tide recedes (artificially cheap money goes away), we’ll see who’s swimming naked – there are many.
Very true. Rising interest rates will cause the repricing of nearly every asset class.
Loose Mortgage Standards Make a Comeback
By Marilyn Kalfus
The Orange County Register
The easy credit that crashed the housing market led to lending standards so strict that Federal Reserve Board Chairman Ben Bernanke blamed them for hurting the recovery.
In recent months, however, lenders have relaxed their grip somewhat as the market has rebounded and home prices have soared.
More ways to get a mortgage are in the offing, mostly for borrowers with solid incomes and strong track records. Real estate analysts also say rising rates could spur renewed competition among lenders.
“They are considerably more flexible than they were two years ago. It’s gaining steam,” said Guy Cecala, publisher of Inside Mortgage Finance, a company that tracks and analyzes the mortgage market. “If you didn’t qualify a year ago, it wouldn’t hurt to go back and find out if you can qualify now.”
Bankers remain cautious but are becoming more accommodating, agreed Erin Lantz, director of Zillow Mortgage Marketplace: “The pendulum is swinging back to more normal, but still prudent, lending guidelines. Loans are becoming a bit more accessible.”
The Mortgage Bankers Association has come up with a tool, the Mortgage Credit Availability Index, to help measure trends in mortgage availability. The index rose 7.2 percent in May from May 2012, meaning it has become “somewhat easier” to obtain a loan, said Rick Allen, chief operating officer of MortgageMarvel.com, a mortgage shopping website.
Here are five ways that mortgage experts say the market is becoming more flexible:
1. Some lenders are easing payment and credit-score requirements. Having a modest down payment or a lower-than-stellar credit score won’t necessarily keep you from buying a home. Between March 2011 and March 2013, Zillow Mortgage Marketplace saw a 570 percent increase in the number of lenders offering conforming loan quotes with down payments between 3.5 percent and 5 percent, Lantz said. That does not include the Federal Housing Administration, which allows down payments of 3.5 percent.
If a borrower can provide a bigger down payment, a bank may dial back on a high credit score requirement. Cecala said lenders have wiggle room because of overlays, standards they impose above those required by mortgage giants Fannie Mae and Freddie Mac.
2. Piggyback loans are popping up. The term describes two mortgages taken out at the same time for one property, so a borrower can avoid paying for private mortgage insurance on a traditional loan representing more than 80 percent of a home’s value. Piggybacks also help borrowers avoid higher interest rates on jumbo mortgages.
Jeff Lazerson, who runs Mortgage Grader, an online brokerage in Laguna Niguel, Calif., said he began offering piggyback loans again this year, allowing borrowers to refinance up to 90 percent of the value of their homes. But unlike piggyback loans in the past, he said, “With these, you have to income-qualify for it and have some skin in the game.”
3. Stated income loans are back. These don’t require tax returns to prove income, but they’re also tougher to get than in the boom days, when they were given to people with no or few financial resources and dubbed “liar loans.”
“I am starting to see lenders advertising stated income loans, which will be helpful to so many self-employed borrowers,” said Christine Donovan, a real estate broker at Donovan- Blatt Realty in Costa Mesa, Calif. “The rates are not great, and it requires higher down payments, though it seems like a step in the right direction.”
4. Subprime loans are emerging again, but with a change. Before the housing crash, some lenders provided interest-only loans to people with bad credit and no collateral. Lenders entering the subprime market now, however, tend to require hefty down payments from borrowers, who may have healthy incomes but went through a short sale or took another credit hit before rebounding.
“We are getting more calls and solicitations from newer lenders that are pushing subprime-type products,” said Dennis C. Smith, co-owner of Stratis Financial Corp., a Huntington Beach, Calif., mortgage firm that does not offer them.
5. Rising interest rates could encourage competition. Lantz predicted rising rates could soften consumer demand and increase the supply of available loans. Lazerson said he sees mortgage brokers and banks imposing fewer overlays in the future.
Interest rates are expected to continue increasing, with some analysts saying 30-year fixed-rate mortgages could hit 5 percent in the next 12 months. (They reached 4.51 percent last week.)
“As there are fewer borrowers and they (lenders) are trying to figure out ways to get loans in the door and fund loans, they’re going to be less restrictive,” Lazerson said.
Thanks for posting. I may use that in an upcoming post. I would hardly characterize these changes as “loose” lending. It seems more like a slight rebound from the very restrictive lending we’ve had over the last four years.
The borrower who will provide a “bigger” down payment is the squatter who was able to sit in his house without making a payment for 4 years and now is gonna be rewarded by being able to rebuy and HELOC his butt off. Basically the banks just figured out another way to get the money they were owed.
Piggyback loans? Nothing like having a 1st and 2nd to start off that homeowner life.
Lol. Stated income and interest only loans? What could go wrong? It worked so well last time.
At a time when loan requirements should be as tight as possible we are relaxing standards. We being lenders and bankers. The way I see it is let it happen again, but this time its on them. Totally and completely on them. All loans are to be kept by b issuing lender. Let’s see how many loans get out now. But we all know that the idiot tax payer is the one who pays out in the end, but that’s just free money so who cares
Nobody wants to actually fix this. Not the banks, not the government and sure as hell not the ponzi buyers. Everyone just wants their house to be worth a lot of money so they can borrow and let the good times roll.
There are far more people who want to see the old system reinstated than there are those who want to see it changed.
MBS and Muni bonds news which influences mortgage rates.
Analysts: Expect mortgage rates to rise, not soar
Mortgage rates shot up after the Fed suggested a potential pullback on quantitative easing, but don’t expect them to soar in the second half of 2013.
Intead, analysts see gradual growth when it comes to mortgage rates.
The market is seeing a lot of volatility due to the Fed’s talks of tapering, said Leonard Kiefer, deputy chief economist with Freddie Mac.
Rates will likely trend up, but won’t spike, although there might be week-to-week changes, Kiefer added.
“I don’t think anyone expected rates to jump by a full percentage point like they did in May,” Polyana da Costa, a mortgage analyst with Bankrate, said. “I think we can safely say they will be higher than they are today.”
Looking ahead 6 months to the end of the year, Kiefer said Freddie Mac is projecting rates to slightly increase to 4.6%.
Rates should remain flat or barely higher than where they are today, Bob Walters, chief economist for Quicken Loans, said. He projects rates will hover around the 4.5% to 4.75% point by the end of the year.
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Muni bond market remains shaken after Detroit bankruptcy
Detroit’s decision to accelerate its plans to file for Chapter 9 last week, marked the largest municipal bankruptcy in the history of the nation.
For Detroit, the bankruptcy is a failure of a municipal government with little to no upside for any city or any of its stakeholders. Thus, municipal bond investors as well as other cities are left wondering if the once-assured asset is the best bet to place.
“The problems that have unfolded in the municipal market are not surprising to those in the industry, the risks have been present for a long time,” Municipal Market Advisors founder and CEO Thomas Does told HousingWire.
He added, “Yes, the pension issue is real and the challenges ahead have been exacerbated by the length of the problems evolution — namely 60 years of negotiating generous benefits between union leaders and politicians. The saddest condition is for those union members, non-union member taxpayers and citizens who now must bear the responsibility and costs for egregious behavior at worst and ignorant behavior at best.”
With Detroit’s downfall, municipal bond investors are debating if this is specific to the city or if it’s a sign of more trouble to come.
Detroit’s population dwindled over the past 60 years from 1.8 million in the 1950s to less than half that number today.
The biggest concern is the nearly $20 billion of unfunded pension liabilities that is scarring municipal bond investors that other cities may follow suit, explained NewOak president and co-founder James Frischling.
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