The availability of credit cycles from periods of tight underwriting standards to periods of lax standards. When credit is tight is when credit-fueled markets like real estate are most stable. In a tight credit environment, lenders are very focused on ensuring the borrower can repay the loan and the lender can recover their capital if they don’t. It would seem obvious and intuitive that lenders would always be focused on those things, but competition tends to drive standards down as lenders take more risk. 
In the early stages of the credit cycle, lenders begin extending credit to less creditworthy borrowers. This adds to the borrower pool, and in the case of real estate, it adds to the buyer pool. This influx of new buyers is an increase in demand which causes prices to rise. Rising prices give lenders greater assurance they will recover their capital in the event one of these less creditworthy borrowers defaults. In fact, the entire subprime business model was built on this phenomenon. Subprime always had high default rates, but as long as the inflow of new subprime borrowers was strong, prices would rise and subprime lenders would not lose much money when they foreclosed. In essence this is a Ponzi scheme because it only succeeds as long as prices are rising. Once prices stop rising, the high default rates cause huge losses which wipes these lenders out.
Once credit starts to contract, standards tighten until borrowers no longer default. If this were not the case, falling prices would cause large lender losses on the bad loans. Only the most creditworthy borrowers are extended credit, and these borrowers are required to put substantial amounts down to protect the lender’s loan capital. That’s where we are today. Credit will loosen up slowly as house prices stabilize and lenders have less risk of loss on their original capital. Once prices reverse, lenders start taking on more risk, more borrowers enter the buyer pool, and the cycle starts all over again.
Interest rates are low, but it’s still hard to get a mortgage
Lenders’ underwriting standards appear to be tightening even further in some key areas, and the time to close a loan is getting longer.
By Kenneth R. Harney — September 30, 2012
WASHINGTON — With 30-year mortgage rates hitting new lows and recent borrowers’ payment performance the best by far in decades, you’d think that banks and other lenders might be loosening up on their hyper-strict underwriting standards.
But new national data from inside the industry suggest this is not happening. In fact, in some key areas, standards appear to be tightening even further, and the time needed to close a loan is getting longer.
The check and balance in the system today is the loan buyback. Well over 90% of the loans originated today are backed by the US taxpayer either through the FHA or the GSEs. To ensure the taxpayer does not absorb huge losses, the bureaucrats overseeing these agencies put strict standards in place regarding the loans they insure against loss. If a loan insured by the government goes bad, a forensic review is done on the file. If any irregularities in the underwriting or documentation are turned up, the originating lender is forced to buy back the loan and absorb any losses associated with it. That is what’s driving the tight lending standards in place today.
The average FICO credit score on new loans closed in August was 750, 9 points higher than it was one year earlier, according to Ellie Mae Inc., a Pleasanton, Calif., mortgage technology firm whose software is used by many lenders. The survey sample represents about one-fifth of all new loans — roughly 2 million mortgages.
At Fannie Mae and Freddie Mac, the dominant players in the conventional mortgage market, the average FICO score was even higher. For refinancings in August, the average approved borrower had a 769 FICO score, up 6 points from August 2011. The average score for borrowers purchasing homes was 763, 1 point higher than the year before.
If the average FICO scores are over 750, not many of the new loans will go bad. People with FICO scores that high don’t default very often.
FICO scores are used by virtually all mortgage lenders to gauge the credit risk posed by a borrower. Scores range from 300 to 850, with low scores representing higher probability of default, high scores indicating low risk. Fair Isaac Co., developer of the FICO scoring model, says 78.5% of consumers have scores between 300 and 749. Barely 1 in 5 consumers, in other words, scores high enough to meet today’s FICO score averages at Fannie and Freddie.
Other signs of how strict lenders’ standards have become:
• The average purchaser of a home using a Fannie-Freddie loan made a down payment of 21% in August and had a squeaky-clean debt-to-income ratio — with total monthly debt payments, including the mortgage — amounting to just 33% of income. Refinancers had an average equity stake in their houses of 30%.
Despite opening up the refi window to underwater borrowers, the average equity is still north of 30%. Debt to income ratios are still high but manageable.
• People who were rejected for Fannie-Freddie mortgages also had seemingly solid credit profiles by historical standards. The typical buyer whose application was declined had a 734 FICO score — up 2 points from a year before — and was prepared to put down 19%.
750 FICO and 20% down is the norm.
• Federal Housing Administration borrowers’ credit profiles were also impressive, especially in view of that agency’s statutory mission to serve consumers with modest incomes, low down payments and less-than-perfect credit histories. In August, according to Ellie Mae’s survey, the average FICO score for FHA refinancers was 717, up 11 points from the year earlier. FHA home purchasers had average scores of 700 — 4 points below what they were 12 months ago — but still far beyond historical norms. The FHA officially accepts FICOs as low as 500 and requires 10% down payments for borrowers below 580 but does little business at these score levels.
If FHA FICO scores are that high, then all the people who went delinquent or defaulted during the bubble collapse are still waiting to buy homes. Their FICO scores won’t be near that high.
• In addition to — or maybe because of — the tougher standards, the mortgage process itself appears to be slowing down. The average time from application to closing for all loans during the time cycle in the Ellie Mae survey was 49 days, nine days longer than the previous August. For refinancings, the average processing time was 51 days, up from 37 days a year earlier.
What’s going on here? Given the Federal Reserve’s repeated interventions to lower the cost of money to banks, why are they keeping their credit requirements so high? Are there any prospects for relief for prospective buyers who simply don’t have 20% or 30% to put down and don’t have elite-bracket FICO scores?
Doug Duncan, the chief economist for Fannie Mae and former chief economist for the Mortgage Bankers Assn., has a unique perspective on all this. He readily acknowledges that big banks — and Fannie and Freddie themselves — are seeing their highest-quality “books of business” in decades, maybe ever, thanks in large part to their strict credit standards and rigorous documentation rules.
The strict credit standards and rigorous documentation rules are a direct result of the threat of buybacks.
He believes, however, that the underwriting cycle could start to loosen up as banks begin to pare their post-housing-bust pricing add-ons for borrowers, their fears of costly buybacks of existing loans recede and long-awaited rules on mortgage lending are unveiled by the federal government.
That’s somewhere on the horizon. But in the meantime, don’t look for any dramatic relaxation. To get a mortgage, you’ll generally need high scores, big down payments — except for the FHA, which accepts 3.5% down — plenty of time and reams of documentation.
Historically, credit standards loosen very slowly. Each incremental change that loosens standards requires time to evaluate its efficacy. Any lender who relaxed too many standards too far too soon would find itself on the losing end of a long stream of buybacks — or in the past, losses on its own portfolio. What really drives lenders to loosen credit is rapidly rising prices and large demand from investors to deploy capital in new loans. Prices won’t be rising rapidly any time soon, and investor demand for 3.5% loans with 30-year amortizations probably won’t increase dramatically either, particularly as less risky and higher yielding alternatives appear when the economy improves.
Turning $8,050 into $211,050
The former owner of today’s featured property is typical of Ponzis from the housing bubble. She bought the property for $161,000 back on 9/21/1995 with a $152,950 first mortgage and a $8,050 down payment. At the peak of the bubble, she refinanced with a $364,000 first mortgage withdrawing a total of $211,050. If that wasn’t rewarding enough, she got to squat for more than two years while the bank delayed her foreclosure over and over again.
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Proprietary OC Housing News home purchase analysis
24545 SUTTON Ln Laguna Niguel, CA 92677
$429,900 …….. Asking Price
$161,000 ………. Purchase Price
9/21/1995 ………. Purchase Date
$268,900 ………. Gross Gain (Loss)
($12,880) ………… Commissions and Costs at 8%
============================================
$256,020 ………. Net Gain (Loss)
============================================
167.0% ………. Gross Percent Change
159.0% ………. Net Percent Change
5.6% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$429,900 …….. Asking Price
$15,047 ………… 3.5% Down FHA Financing
3.38% …………. Mortgage Interest Rate
30 ……………… Number of Years
$414,854 …….. Mortgage
$116,841 ………. Income Requirement
$1,835 ………… Monthly Mortgage Payment
$373 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$107 ………… Homeowners Insurance at 0.3%
$432 ………… Private Mortgage Insurance
$271 ………… Homeowners Association Fees
============================================
$3,018 ………. Monthly Cash Outlays
($270) ………. Tax Savings
($667) ………. Equity Hidden in Payment
$16 ………….. Lost Income to Down Payment
$74 ………….. Maintenance and Replacement Reserves
============================================
$2,171 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$5,799 ………… Furnishing and Move In at 1% + $1,500
$5,799 ………… Closing Costs at 1% + $1,500
$4,149 ………… Interest Points
$15,047 ………… Down Payment
============================================
$30,793 ………. Total Cash Costs
$33,200 ………. Emergency Cash Reserves
============================================
$63,993 ………. Total Savings Needed
The property above is available for sale on the MLS.
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50 Responses to “Low interest rate mortgages still require stellar credit scores”
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Apparently, lenders are in no hurry to process their foreclosures.
Foreclosure Activity Falls to Five-Year Low: RealtyTrac
Foreclosure filings — including default notices, scheduled auctions, and bank repossessions — were reported on 180,427 U.S. properties in September, according to RealtyTrac. The total number of filings last month was down 7 percent from August, down 16 percent from September 2011, and was the lowest monthly total recorded by RealtyTrac since July 2007.
The foreclosure tracking company says the decrease in September helped pull Q3 2012 numbers down to make it the lowest quarterly reading since the fourth quarter of 2007.
Foreclosure filings were reported on 531,576 properties during the third quarter of this year, a decrease of 5 percent from the second quarter and a decrease of 13 percent from the third quarter of 2011. It marks the ninth consecutive quarter of annual declines in foreclosure activity.
According to RealtyTrac’s report, one in every 248 U.S. homes received a foreclosure filing during the July-to-September period. The company says U.S. foreclosure starts in the third quarter decreased both from the previous quarter and a year ago, reversing the rise seen in new foreclosures during the second quarter.
“We’ve been waiting for the other foreclosure shoe to drop since late 2010 … but that other shoe is instead being carefully lowered to the floor and therefore making little noise in the housing market —- at least at a national level,” said RealtyTrac VP Daren Blomquist.
“Make no mistake, however,” Blomquist added, “the other shoe is dropping quite loudly in certain states, primarily those where foreclosure activity was held back the most last year.”
A number of judicial foreclosure states — including Florida, Illinois, Ohio, New Jersey, and New York –- registered substantial year-over-year increases in foreclosure activity, whereas non-judicial foreclosure states such as California, Georgia, Texas, Arizona, and Michigan posted sizable declines.
Blomquist says states where foreclosures were not so dammed up last year could still see a roller-coaster pattern in activity going forward because of regulations and court rulings that have substantively changed the rules for proper foreclosure processing. He contends a backlog of delayed foreclosures will likely build up in those states as lenders adjust to the new rules.
Charting The ‘Housing Recovery’ Subsidy:
A month ago, when RealtyTrac posted their latest US foreclosure numbers for the month of August, we presented what we called was the “Foreclosure Stuffing” thesis, explaining the explicit subsidy by the banks for the housing market, whereby the entire foreclosure process has now ground to a halt, and in doing so removing millions in inventory flow from the distressed end market, forcing limited buyers to chase what supply there is, and in the process boosting prices of existing inventory higher.
http://www.zerohedge.com/news/2012-10-11/charting-housing-recovery-subsidy-foreclosures-slide-five-year-lows
That’s exactly what they banks are doing. Unfortunately, they are also succeeding in their efforts.
I concede. They can print. And print they will.
The fallout created by choosing this path will make 2008 look like a bull market.
That concerns me as well.
They will print money until the economy makes superficial signs of improvement and house prices rebound. The ramifications of this will be many. As with any manipulation of the market, there will be winners and losers, and the ones selected will be largely at random — except for the elites: they always win.
It’s interesting to note that the drop in foreclosures was led by California. Perhaps the threat of nuclear winter is having the intended effect.
There was a surge in refinancing when the opened the door to underwater borrowers. They probably delayed many defaults and foreclosures with those loan modifications.
Re the above purchase analysis, since the overall price trend is still down, I would factor-in a 2% price drop over the next 12 months as a hedge. If the drop doesn’t pan-out–remains flat, or even miraculously rises a bit, then it’s icing on the cake for the buyer.
A 2% drop YoY on $430k purchase price = $8600. divide by 12mo = $716.67
Bumps the monthly cost of ownership up from $2,171 to $2887.67
just say’n
Anyone who needs to sell in the next three years shouldn’t be considering buying anyway. It typically takes two or three years of appreciation in a normal market to overcome the transaction costs. Factor in a year or two of flat prices, and most buyers shouldn’t consider it unless they plan to stay put for three to five years.
Credit Agency wants lenders off the hook if they sell bad loans to the government
What?!? Have they been in a closet for 10 years? Loose standards lead us to where we are right now.
DBRS: GSE relief on repurchase risk not enough
By Kerri Ann Panchuk October 9, 2012 • 8:38am
A new plan to relieve lenders of repurchase risk when selling loans to Fannie Mae and Freddie Mac is a big step forward, but may not go far enough to ease financial firms’ concerns, analysts with credit ratings agency DBRS said.
Additionally, DBRS believes the new plan, announced last month, is set up so that mortgage servicers need to gauge future repurchase risks. This is simply unreasonable, DBRS claims.
Earlier this month, the government housing agencies said they would roll out new reps and warrants requirements, providing relief on reps and warrants putback risk for loans that establish acceptable payment histories.
Under the reps and warrants clause of the mortgage contract, GSEs have the option to force a lender to buy back a loan that breaches certain representations made about the loan upfront.
But to help financial firms, the GSEs said all of the loans acquired by the GSEs after Jan. 1, 2013 only have to show that the loan had no 30-day or greater delinquencies during the first 36 months or it had no more than two 30-day delinquencies and no 60-day or greater delinquencies during the first 36 months to avoid buyback risk.
What is the real extent of this housing recovery?
There are still a lot of threats to this housing recovery.
Is Housing Recovering as Much as Everyone Thinks?
Published: Tuesday, 9 Oct 2012 | 10:41 AM ET
The news is finally good: Consumer sentiment in housing is at the highest level since the recovery began.
Realtors say not only are buyers coming back, but much-needed sellers are too. Inventories of distressed properties are shrinking, and mortgage rates are hitting record lows nearly every week. (Read More: Is Housing Rising From Ashes? ‘Industry Has Come Back’.)
The housing crisis is over, right?
“While we have seen many dramatic headlines touting the housing recovery over the last 3.5 years, these headlines and the analysts who author them have been over- predicting changes in the housing market (versus what actually occurred).” said Laurie Goodman of Amherst Securities in a new report.
“Recoveries, with attendant price increases, were anticipated in the spring and summer of 2009, 2010 and 2011; by the fall and winter the predictions of price changes were amended to reflect further price declines. In actuality, after netting out the seasonal factors, home prices have been little changed in the past few years.”
Does that mean that we’re headed for yet another housing scare come Halloween time? Is housing’s winter chill just around the corner? Not according to the bulk of Americans surveyed in yet another new report:
“Consumers are showing increasing faith in the nascent housing recovery,” said Doug Duncan, senior vice president and chief economist of Fannie Mae. “Home price change expectations have remained positive for 11 straight months, and the share expecting home price declines has stabilized at a survey low of only 11 percent.”
The expectation is now that home prices will increase an average of 1.5 percent in the next year, according to the survey, and that has sellers coming back to the market. Of those surveyed, 19 percent said now is a good time to sell. That’s the highest since the survey began in June 2010. But wait, 19 percent? That’s still not a lot.
These national surveys seek overall trends and tout big headlines, but real estate is and always will be local, and this recovery is becoming increasingly local. That is clear in the latest numbers on supplies of distressed homes.
The so-called “shadow inventory” of homes that either have seriously delinquent mortgages, are in the foreclosure process or are bank-owned but not yet listed for sale, fell to 2.3 million units in July according to CoreLogic. That’s a 10 percent year-over-year drop, and puts the supply at about six months by the current sales pace.
“The decline in shadow inventory has recently moderated reflecting the lower outflow of distressed sales over the past year,” said Mark Fleming, chief economist for CoreLogic. “While a lower outflow of distressed sales helps alleviate downward home price pressure, long foreclosure timelines in some parts of the country causes these pools of shadow inventory to remain in limbo for an extended period of time.”
And that’s the problem. In states where a judge is required in the foreclosure process, like New York, Florida and New Jersey, foreclosure timelines are still marked in years, not months. That will keep home prices from recovering as quickly there. Prices could in fact deteriorate.
The NAr is always, always wrong.
Distressed Sales Interfere with Accurate Appraisals: NAR
Inflated appraisals were identified as one of the causes of the housing bubble, and now undervalued appraisals are viewed as a reason for a stalled recovery.
In a September National Association of Realtors (NAR) survey related to home appraisals over the past three months, 11 percent of Realtors said a contract was cancelled because a home was appraised at a value below the negotiated price.
Another 9 percent said a contract was delayed, and 15 percent said a contract was renegotiated to a lower sale price.
A much larger majority, 65 percent, reported no contract problems stemming from home appraisals.
One reason for the low values, according to the NAR, is because some appraisers are not taking into account the difference between distressed and non-distressed homes when making comparisons.
“Some appraisers are using foreclosures, short sales and run-down properties as comparable homes, and are not making adjustments for market conditions or the condition of the property,” the group stated in a release.
Compared to traditional sales, a foreclosure sells for a 20 percent discount on average and a short sale for a 15 percent discount.
NAR acknowledged issues appraisers deal with, noting “appraisers have faced undue pressure – whether from a lender or an AMC – to complete appraisals using distressed sales as comps, to complete an appraisal in an unacceptably short time frame, and to complete a scope of work that is not justified by the fee being offered.”
NAR further added some appraisers have to use eight to 10 comparable sales when previously, three comparable homes were sufficient and the norm.
When using a high number of comps, discounted, distressed homes end up in the equation. NAR explained this can lead to traditional homes in good condition being compared to distressed homes without appropriate adjustments.
However, with the distressed market share decreasing, the impact of distressed inventory on appraisals should also subside.
According to the NAR, distressed sales accounted for about one-third of all sales in 2011, and by 2013, the association expects to see the share of distressed sales fall to 10 to 15 percent.
Even if the issue of distressed properties starts diminishing, there are still other issues in the appraisal industry NAR addressed, including out-of-town appraisers who are not familiar with the area or local market conditions, slow turnaround times, and inconsistencies and fluctuations in appraised values.
NAR President Moe Veissi, broker-owner of Veissi & Associates Inc., in Miami, explained the NAR’s position on the issue.
“Our long-standing policy is that all appraisals should be done by licensed or certified professionals with local expertise, which also is what Fannie Mae and Freddie Mac recommend, but clearly this isn’t practiced universally,” he said.
“In the meantime, buyers, sellers and real estate agents need to be aware that there are problems with some real estate appraisals, but also be aware of their rights to communicate with appraisers and lenders about errors or concerns with individual valuations,” he added. “In some cases, a second appraisal may be justified.”
My appraisal last month identified a comp for sale and its price, but qualified the asking price as a “short sale offering price designed to create immediate interest and a quick sale.” This short sale was asking $80k below the last nearly identical comp’s sale price.
That’s an accurate assessment of what agents do with short sales. In those circumstances, the listed property should be ignored. However, if it closes $80,000 under recent comps, then it is a comp because it’s a closed sale.
Maybe after 3 years of squatting and no repairs, the house is in much need of cosmetic and structural repairs. Just think of the damages from a leaky drain pipe or roof does for 3 years. Two years of not watering nor weeding the landscape has no affect on property value?
But since RE always goes up, the squatters without maintenance make the property appreciate.
The interest rates charges should be different according to the risk. It should not be an all or nothing rating system. What Donald Trump’s FICO score and how many times has he walked or his corporations walked or renegotiated?
You got it. Bought a short sale last year. Roof had been left leaking for years. I got to clean up and pay for the mess. Seller lied about the leak when asked about the mold and water damage.
But I paid 549 and 2 of the same floor plan sold down the street in the 700s recently. I still have lots of repair work to do, but should still come out ahead in the end.
This is an area where real judgment is required and there is no simple answer. If foreclosure sales/short sales/distressed sales are a significant part of the number of properties that have sold, then an appraiser has to use them in the appraisal.
Whenever a realtor or developer says that these properties should not be used as “comps” I say, “If you were shopping for a home, would you want your realtor/agent to exclude them from the properties shown to you?” Usually people want to see “everything out there” – especially if its a bargain. If that’s the case, and if the bargains influence the market, you have to incorporate them into the appraisal.
I can see where in a healthy market where distressed sales are a small percentage of the sales its appropriate to either exclude them or adjust them upward substantially for comparison purposes.
“I can see where in a healthy market where distressed sales are a small percentage of the sales its appropriate to either exclude them or adjust them upward substantially for comparison purposes.”
And that’s exactly what they do. In fact, in a healthy market, distressed sales often sell at recent comp value because multiple bidders prevent sales from occurring below recent comparable sales.
Another problem with distressed properties’ reported sales prices (and reported sales prices of new homes), is that they’re not accurate.
e.g. I know two people who have bought short sales recently. One was required to payoff a second mortgage on the property ($15k) and that amount was not reflected in the sold price. Another was required to pay the realtors’ commissions outside of the sold price ($30k).
New home sales have made use of this phenomenon in the other direction. When sales slump, the prices generally don’t decline, but the builders start offering incentives and free upgrades which don’t reflect in the final price.
Yes, and I know of an insane example. Last year my sister-in-law was seriously considering buying in a new development in Central CA. The asking price was $250k, but because they weren’t selling, they were offering $40k in upgrades.
“The asking price was $250k, but because they weren’t selling, they were offering $40k in upgrades.”
It’s the builders who complain the loudest about low appraisals, yet everyone knows they play games like that.
Perspective -
A good appraiser verifies the sale and adjusts for those factors. A good appraiser does not blindly accept the reported selling price and run with that. Of course, good appraisers tend to charge more because they do more work than a mediocre appraiser. For people willing to pay for quality a good appraiser is worth it.
People don’t want to pay for good appraisals. Most people simply want the appraiser to tell them what they want to hear and make sure they get the loan they want — unfortunately.
Respectfully, sometimes I think you really don’t get it. “People with FICO scores above 750 don’t default often.” Except when they are underwater and experience an income shock, which happens quite a lot actually. That was what happened when the subprime crisis moved up the scale towards the solidly middle class and even higher. Or don’t you remember that inflection point? It was at this stage that the crisis was cryogenically frozen (oh so conveniently, in the year prior to a major election). We shall see soon enough what happens when things are allowed to thaw.
My guess is that millions of defaulting homeowners will be washed away, their houses sold to private equity firms, their credit ruined for years. At this stage there will be a hue and cry to lower the standards and many of these people will be allowed to buy houses again from said PE middlemen, who will leak inventory onto the market steadily to maximize profit. Taxpayers will foot the bill, but they won’t know it, so who really cares?
The way you yammer on sometimes about the need to “tighten” credit standards is quite astonishing given how insightful you are in all other respects. It suggests that you are letting your own desire to buy low get in your way of understanding the “big picture.” Take yourself out of the equation and see what happens. We are all small fry who don’t really count in the Shark Wars of the 21st century. Credit score is a random signifier. The only thing that matters is who controls the flood of capital and when they choose to shut it off (for their own reasons) or open the floodgates (again, for their own reasons).
I suggest you go watch Chinatown again. Credit is the new water. Everything else is the same.
I think credit should be tight, especially now that it is backed with my tax dollars. Bad loan loses are transferred to the tax payer.
For the last 15 years, cheap credit was used in place of real economic growth. Loose credit will just start the cycle all over again. You can’t have a credit system where 10% of the home loans are always bad. If you then you need to 15% mortgage rates to cover the losses.
There was reason for 20% down payment, DTI at 30%, and loans no bigger than 2 to 3 times your income. That was good system, I hope one day we get it back.
“There was reason for 20% down payment, DTI at 30%, and loans no bigger than 2 to 3 times your income. That was good system, I hope one day we get it back.”
I agree. If that were the case then either paychecks would have to rise across the board or house prices would have to fall. Either way would be fine. In the absence of that we turn the equation upside down–how do we get prices back up to unrealistic highs without adding risk to the system?–and crank up the gimmickry and complexity that caused the 08 crash. Brilliant!
My point remains the same: the systemic BS is now baked into the pie. We dance when they play the music, sit down when they stop, and when millions of people get caught doing the wrong thing (I didn’t say Simon Says!) they pay a huge price.
We haven’t fixed anything. All I’m saying is that credit score is a piss poor indicator for future action. The system as it stands craves fresh meat. And guess what? The young people buying in places like Westwood are setting themselves up for the same shocks as their elders. Their credit scores are high but they are piling on the debt and their future income is far from certain. Lather, rinse, repeat.
I’m with you on loosening down payment requirements for owner-occupants (and conversely raising them on investors seeking financing). However, I’m not at all in favor of getting people in homes in which the PITIA eats-up half their net household income.
Wishfull thinking. Everyone needs to throw out the old books on capitalism and free market economies. We have niether and for a long time. What we have is Creditism and fascism. It is only massive debt and liquidity by the Fed that is keeping us going. Only the people who still believe we have capitalism freak out over this. Get over it! Since we left the gold standard our futures have been built upon credit.
So lets hope the great minds on wall st come up with another “creative equation and product” to spur another bubble fast. Or else the masses will get hungry and angy soon.
” It is only massive debt and liquidity by the Fed that is keeping us going.”
I have a post coming out tomorrow that illustrates this well. The current cost of ownership in Orange County on a monthly payment basis is the same today as it was in 1989. The fact that houses are twice as expensive is entirely due to a decline in interest rates from 10.7% to 3.5%. The last 23 years of appreciation is built entirely on cheap debt.
Creditism.
It will be interesting to see the effects on market sentiment of real estate lagging inflation as interest rates begin their decade(s) long ascent.
“Prices won’t be rising rapidly any time soon, and investor demand for 3.5% loans with 30-year amortizations probably won’t increase dramatically either, particularly as less risky and higher yielding alternatives appear when the economy improves.”
Just a quick clarification… I believe that the 3.5% mortgage is available only on homeowner occupied properties. For an investor, the rates are probably higher – I am guessing in the 4.25-4.5% rates.
If the non-occupied rates were really at 3.5%, I think there would be a very strong demand for such cheap money.
When I was speaking of investor demand, I was thinking about the MBS pool investors who are providing the capital for these mortgages. The federal reserve is buying some of these mortgages, but most are still packaged up and sold to private investors. These investors want a good return, and many are buying longer term bonds for their better yields. The moment short-term rates begin to rise, there will be an exodus from long-term bonds, and those rates will rise too.
For mortgage interest rates to move even lower, investors would need to increase their demand for long-term debt. Given the already low returns, I don’t see this demand increasing, particularly when an improving economy will provide other alternatives.
“… I believe that the 3.5% mortgage is available only on homeowner occupied properties…”
That rate is limited to loans below the conforming loan limit too (< $417k). Add 25-50 bps for a loan $417k-$625k (jumbo conforming). Add another 50+ bps for loans above $625k.
The conforming loan limits haven't been published for 2013. Does anyone know if Fannie/Freddie limits require Congressional action to keep the "jumbo conforming" limits? Does anyone know if FHA's $729k limit requires Congressional action to be extended beyond 2012?
It looks like FHA’s $729k limit is good through 2013. I’m still trying to research whether FHFA has the authority to extend Fannie/Freddie’s “jumbo conforming” limits beyond 2012.
I haven’t read anything on this yet. I strongly suspect the FHA limit will remain where it is because otherwise the market for houses above the conforming limit but below the FHA limit will suffer. They should lower the conforming limit to get the GSEs out of house finance, but we all know that isn’t likely to happen, at least not in the short term.
I remember that post you did a year ago. What was it like 85% of the market disappeared when the FHA conforming limit was lowered in Irvine.
I wonder when they will do a Super FHA type program? $729K to $1.1 million loans, but with even higher premiums as percentage. For the discriminating bubble buyer that wants to skip entry level homes on their first purchase.
“I wonder when they will do a Super FHA type program? $729K to $1.1 million loans, but with even higher premiums as percentage.”
I’m sure the idea has been floated in Washington. Financing million dollar homes is so far from the original FHA mandate that I hope it doesn’t happen. Many high wage earners would support the idea, particularly with 3.5% interest rates making such large sums financeable.
At this point, I don’t think down payment amounts matter when trying to qualify. If you can scrounge 5% down, you can get a conventional mortgage. What matters more is the inconsistent job histories and unsteady incomes that so many people have dealt with over the past 5 years.
Those that have had steady work and incomes for at least two years, and meet the other basic loan requirements, are in good shape. The rest are out of luck no matter how much you saved, how high your FICO, or how low your DTI.
Income history is one of the more subjective parts of underwriting a loan and one of the easiest for Fannie/Freddie/Ginnie to question when forcing a repurchase. This is why business owners are essentially locked out of the market now.
“If you can scrounge 5% down, you can get a conventional mortgage.”
Is the PMI higher or lower than FHA at 5%? Just curious, FHA has increased their insurance premiums over the last few years.
PMI is far cheaper but is also harder to qualify for. You need to pass underwriting twice, once with the lender and once with the PMI insurer. One huge advantage to PMI is you can cancel early by accelerating your mortgage pay down, whereas FHA forces you to pay MIP for the first 5 years with no chance to cancel early.
The 5% down loan with PMI is a good option today. I’ve heard you can even pay off the PMI up front and not deal with it as part of the payment. The incremental cost of the FHA mortgage is pretty high, and as you point out, your stuck with it for five years.
You can choose to pay a lump-sum PMI upfront or you can choose to have the lender pay it (LPMI) in exchange for a higher rate.
e.g. On a $500k 30-year mortgage at 90% LTV, you’d pay ~60 bps PMI til you reach 78% LTV and get a ~4% rate.
But you could opt for LPMI and get a ~4.5% rate. This option is attractive if you’re a higher-taxed household and you expect the MID to survive.
It’s also a good idea if you think inflation is coming. Borrowing as much as you can at 3.5% will look wise when inflation is running at 5% or higher.
I wouldn’t take either option. Paying the PMI upfront is great for the insurer because there’s no chance you will rob them of their premium by cancelling early. Building PMI into the rate could lock you into paying it for much longer than 5 years. You would be stuck paying it for the life of the loan unless you were able to refi out while rates are still low. For a select few, I could see these options making sense for tax reasons.
“…FHA forces you to pay MIP for the first 5 years with no chance to cancel early…”
But if you choose a 15-year option and the corresponding sub-3% rate, you get down to 78% LTV in fewer than four years. I also believe, with the shorter term, the five year seasoning isn’t required.
That’s true. I was only referencing 30 year mortgages. For people that can’t qualify for conventional, but want a 15 year term, the FHA program isn’t bad.
Thanks. I’ll have close to a 15% down payment next summer, that’s why I was asking. But I’ll might wait another year until inventory comes back.
I would go for a conventional loan over FHA because it should be the cheaper option for you. Also, you might want to look into Fannie Mae Homepath financing if you buy one of their REOs. There’s no mortgage insurance required.
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