I was SOOO wrong about rates…. BUT it is such good news for home purchases and refinances.

In both my blogging and personal conversations with borrowers, realtors and other business partners, I have been very measured in my comments on where rates could be in the future. Because rates spiked last year just before the holiday season and took eight months to grind down to the same levels again, I was very hesitant to say that I thought rates would stay low as we came to into November. I was SOOOO wrong about that view on rates. Not only have we had record rates as we throughout the Fall, but rates have actually stayed low as Thanksgiving has passed on by.

As you can see from the graph below, rates (as measured by the Weekly Primary Mortgage Market Survey done by Freddie Mac) were very attractive throughout the summer of 2010 but spiked up the week before Thanksgiving. In my opinion, this was largely due to mortgage-backed investors and therefore banks raising rates so that investors could clean-up their balance sheets before year-end and banks could close the loans in their pipeline by December 31. Folks who had an opportunity at a 4.125% rate but wanted to wait until rates were at 4.000%. By December, 30 Year Fixed Rates were at  4.860%.

I thought that the same thing would happen this year…..It is obvious that I was completely wrong!!! If you look where rates are today hovering around 4.000% two weeks after Turkey Day, it makes you wonder if there will be an uptick of rates by year-end. Why are we so fortunate? We should send a special thanks to the European Union. From the Greek (or was it Italian) debt crisis to the threatened down grade of fifteen (15) European countries by Standard & Poor’s today, there has been nothing but bad news about European sovereign debt and banks. Because Europe has not found a solution to its debt problems, investors have continued to take a flight to quality by buying treasury bonds and mortgage-backed securities. That has kept mortgage rates low up until now and will likely keep rates low into the New Year as it seems unlikely that Europe will solve its problems before then.

So I was SOOOO wrong about rates going up in November, but it is SOOO good for people looking to buy a home or refinance their mortgage.

30 Year Fixed Rate Mortgage Rates

Let’s Twist Again!!!……Mortgage Rates Are At All Time Lows!!…But Will It Last??

The Fed released its statement Wednesday afternoon, and mortgage rates dropped to historical lows soon afterwards.

First, quite simply, the Fed confirmed that there are “significant downside risks” to the US economic outlook. Slower economic growth reduces the chances of inflation, which is good for mortgage-backed securities and Treasury bonds. Also, when economic growth is slow, investors tend to sell growth driven investments like stocks and buy safer investments like mortgaged-backed securities and Treasury bonds. When people buy more bonds, the price of the bonds goes up and the rates go down (Trust me, its bond math!). Because almost all mortgages are funded by mortgage-backed securities, lower rates on mortgage-backed securities lead to lower mortgage rates.

Second, the Fed announced the widely expected Operation Twist program. This program will extend the average maturity of the Fed’s portfolio by purchasing $400 billion of longer-term Treasury securities and selling an equal amount of shorter-term Treasuries. What this does is create extra demand for longer-term Treasury bonds. More demand equals prices going up for Treasury bonds which means that the rates on Treasury bonds goes down. Because mortgage-backed securities are priced from Treasury securities, if Treasury rates go down, the rates on mortgage-backed securities goes down. Because mortgages are funded by mortgage-backed securities, when the rates on the bonds go down, the rates on mortgages go down.

This all sounds great but will it work? The Fed tried this measure in the 1960s with any great success. Economists are predicting that Operation Twist will have little impact on the economy. It may lower rates by 0.1% to 0.2%, but that is unlikely to help economic growth. On the other hand, this benefit was immediately priced into the market and rates dove on Thursday and Friday. In addition, this will help to keep rates low as the Fed begins to carry out this policy.

The third major element from the statement by the Fed was a surprise to investors and will actually have a wider impact on mortgage rates. The Federal Reserve owns a massive amount of mortgage-backed securities. These bonds are backed by thousands of mortgages that have monthly principal payments and prepay when there is a refinance of a mortgage. All these payments of principal by the mortgages underlying the mortgage-backed securities means that there are billions of dollars of principal coming from the mortgage-backed securities that will come back as cash to the Federal Reserve. The big news is that the Fed will begin to reinvest principal payments from its mortgage-backed securities holdings in more mortgage-backed securities. Until now, the Fed has been reinvesting the principal payments in Treasury securities.

With roughly $885 billion in mortgage-backed securities holdings in the Fed’s portfolio, these principal payments will be re-invested into a significant sum of mortgage-backed securities. Along with Operation Twist, this program will create a significant source of more demand for mortgage-backed securities. Just as I said before, more demand for mortgage-backed securities leads to higher prices and ultimately lower mortgage rates. The impact of the announcement was priced in very quickly in the mortgage-backed securities markets and ultimately into lower mortgage rates. Although the Fed has not yet begun to purchase securities under the new programs, investors have already factored in the expected impact of the added demand on mortgage-backed securities prices. Following prior Fed announcements about purchasing mortgage-backed securities, nearly all the benefit took place right away.

This is GREAT! We should see mortgage rates stay low for  some time!!! Now is a great time to refinance or get mortgage financing to buy a home. Rates should stay low for the rest of the year and into next year….MAYBE.

All of these factors are great for mortgage rates on a go forward basis. That being said, there is one reason that we cannot forget. By mid-November, banks and investors begin to look toward the end of the year. Investors want to clean up their books for the end of the year and will stop buying new securities. The people at investment firms start to enjoy the holidays and there are fewer people. This all leads to less buying of mortgage-backed securities. Likewise, banks do not want to lend much more money because they want to close all the loans in their pipeline by the end of the year. With missing staff on holiday, they need to close these loans with fewer people. How do banks limit the volumne of business that they have? They do not shut their doors, they just raise mortgage rates to drive new customers away!! This all leads to less demand for mortgage-backed securities and mortgages. Less demand means that prices fall and rates go up (bond math again!!).

We saw this happen last year when by the end of November rates had gone from record lows to up by 1%. People who were waiting to save 0.125% on a refinance, could not refinance at all. I cannot predict the future of rates (or I would not be here writing this!), but you cannot ignore the impact of the holidays on the mortgage market. If a refinance or home purchase is in your plans for 2011, now is the time to act so you do not miss out.

Source: http://money.cnn.com/2011/09/21/news/economy/federal_reserve_operation_twist/?cnn=yes

The HELOC is Back and Can Decrease Your Down Payment to About 10%…Just be Careful of the Floating Rate Risk!!!

In the past, you could use a Home Equity Line of Credit (HELOC) to structure mortgage financing that served a number of borrower needs. Well, the HELOC is back! As described below, a HELOC can be used so that the borrower can take advantage of the low rates for Conforming Mortgages but still keep their Combined Loan to Value (CLTV) at 80%. With Jumbo rates near 5.50% and a payment of $5,252, the weighted average rate of 4.46% with its $3,327 payment is very attractive. Borrowers need to have enough money in the bank should the floating rate on the HELOC rise suddenly.

Purchase Price	925,000			% Financing
Conforming Mortgage	417,000	45.08%	LTV	56%
HELOC	323,000	80.00%	CLTV	44%
Total Financing	740,000			100%
		Index	Margin	Rate	Payment
Conforming Mortgage	417,000	N/A	N/A	4.25%	2,051
HELOC (Prime Index)	323,000	3.25%	1.49%	4.74%	1,276
Total Financing	740,000			4.46%	3,327

Here is another use of the HELOC. In this case, the borrower wants to avoid a Jumbo loan at 5.50% (payment of $3,407) and raise his CLTV to 89.99%. In this case, the 4.48% rate with a payment of $2,588 is very attractive, and the borrower is putting down almost $60,000 less than a traditional 80% Loan to Value (LTV) Jumbo loan.  Once again, this structure is not for everyone. It is a little safer because only 23% of the financing is floating, but you still need assets in case rates rise.

Purchase Price	600,000			% Financing
Conforming Mortgage	417,000	69.50%	LTV	77%
HELOC	122,950	89.99%	CLTV	23%
Total Financing	539,950			100%
		Index	Margin	Rate	Payment
Conforming Mortgage	417,000	N/A	N/A	4.25%	2,051
HELOC (Prime Index)	122,950	3.25%	1.99%	5.24%	537
Total Financing	539,950			4.48%	2,588

Many folks who have less than 20% for a down payment just dread the thought of mortgage insurance. Instead of using mortgage insurance to get to an 89.99% CLTV, you can get a Conforming Mortgage with a HELOC and avoid mortgage insurance. The structure below would have a payment of $1,312 at a weighted average rate of 4.36% compared to the $1,632 payment with a 4.25% rate and mortgage insurance. Although this financing is safer because only 11% of the financing is floating, you should still be comfortable with the risk of a floating rate HELOC.

Purchase Price	300,000			% Financing
Conforming Mortgage	240,000	80.00%	LTV	89%
HELOC	29,975	89.99%	CLTV	11%
Total Financing	269,975			100%
		Index	Margin	Rate	Payment
Conforming Mortgage	240,000	N/A	N/A	4.25%	1,181
HELOC (Prime Index)	29,975	3.25%	1.99%	5.24%	131
Total Financing	269,975			4.36%	1,312

Rates below are not market rates. They are used simply for presenting an example of how the structures could work. To fully understand the benefits of these structures, you need to consult a mortgage banker to get market rates and Annual Percentage Rates (APR).

Why Pay Mortgage Insurance???….when you can get someone else to do it for you!!

Buyers have several options to pay for mortgage insurance. In addition to the traditional monthly payment option, home buyers can pay for all or a portion of their mortgage insurance by either (a) adding the upfront payment to the loan balance OR (b) having the SELLER PAY FOR IT with SELLER’S CONCESSIONS.

Here are some sample premiums for mortgage insurance payments that are monthly, upfront or split:

Payment Type	Credit Score	Down Payment	Monthly	Upfront	Split Pay Option
Monthly Payment	700+	5%	0.94%	0.00%	0.51%
Upfront Payment	700+	5%	0.00%	2.70%	1.25%
Payment Type	Credit Score	Down Payment	Monthly	Upfront	Split Pay Option
Monthly Payment	680+	10%	0.62%	0.00%	0.18%
Upfront Payment	680+	10%	0.00%	1.60%	1.25%
Payment Type	Credit Score	Down Payment	Monthly	Upfront	Split Pay Option
Monthly Payment	680+	15%	0.38%	0.00%	0.06%
Upfront Payment	680+	15%	0.00%	1.00%	1.25%

Because a buyer with a 5%-15% down payment can receive a minimum of 3% in Seller’s Concessions, buyers can have their mortgage insurance paid by the seller at closing. This benefit applies to loan amounts from $100,000 up to $417,000!

By having the Seller pay for the buyer’s mortgage insurance, buyers can save a significant amount of money on their monthly housing payment. For right or wrong, borrowers are extremely focused on their interest rate and the amount of interest that they pay. In realty, the cost of mortgage insurance is a far more powerful driver of financing cost than the interest rate on the loan.

For example, buyers of a $400,000 home will save nearly four times (4X) as much by having their mortgage insurance paid by Seller Concessions than the same borrower would save in interest payment if their interest rate were reduced by 0.25%. Likewise, these same buyers will save almost two times (2X) as much by not paying mortgage insurance than they would if their interest rate were reduced by 0.50%. The same analysis applies to loan balances as low as $100,000.

Finally, the removal of the monthly mortgage insurance payment from a borrower’s monthly debt calculation could make the buyer eligible for a loan who might not otherwise qualify because his debt-to-income ratio is too high with the mortgage insurance included. By having mortgage insurance paid up front, you should be able to qualify more borrowers to buy larger homes.

To FHA or not FHA, that is the Question….Here are cold hard the facts!

For folks who are looking to buy a home, they are often faced with the question of whether or not to apply for an FHA loan. If you are a first time home buyer or have a couple of bumps on your credit, it sounds like a great idea. You can buy a home with a credit score as low as 640, a down payment as low as 3.5% and have a debt to income ratio that is 50% or even greater.

If you want to buy a new home but do not want to sell you current home, you can use that higher debt to income ratio to support owning two homes at the same time. If you have great credit and enough income, an FHA mortgage will allow you to buy a home with a minimal down payment. You can get your entire down payment as a gift or get up to 6% of the purchase price in seller credits to cover the escrow deposits and closing expenses. If you use seller credits to pay for your upfront mortgage insurance premium, an FHA loan can even be less expensive than a conforming loan.

But what about those rumors that you hear that an FHA loan is the new subprime mortgage???? Are FHA loans for people with bad credit who cannot handle their personal finances???

If you live in a condominium, do you want people with FHA loans living in your building??? Will these folks be defaulting on their loans and condo association dues??? If you are on the Condo Association Board, are you doing the right thing by having your building eligible for FHA borrowers???

FHA BORROWERS ARE GREAT AND YOU WANT THEM IN YOUR BUILDING!!!!!!

Here are the COLD HARD facts about FHA borrowers and FHA eligible buildings:

• FHA insured nearly 40% of all purchase mortgages in 2010…roughly $200 billion
• The average credit score for a home buyer taking out an FHA-insured mortgage in the fourth quarter of 2010 was 701 – these were NOT subprime borrowers
• The maximum loan balance for an FHA loan is $410,000 compared to a maximum loan balance of $417,000 for conforming loans bought by Fannie Mae and Freddie Mac
• FHA mortgages can be used to buy beautiful homes in outstanding neighborhoods
• Currently, FHA mortgage rates are lower than conforming mortgage rates, indicating that the market prefers FHA loans to conforming loans
• FHA loans have been in existence since 1934, a few years longer than conforming loans insured by Fannie Mae – FHA loans are not a new form of lending
• It is easier for a Condo building to become FHA eligible than it is for the building to become eligible for buyers who want conforming loans

In this time of uncertain financial conditions, FHA loans are an opportunity for many decent folks to get access to a home for the first time or to find a larger home for their families. FHA borrowers are successful, responsible home buyers who would make any building a better place.

BUT why would you care to have your building FHA approved?

I know this is an exageration, but an extra 200 BILLION potential buyers for your condominium units should be enough of a reason to get your building FHA approved. To say this more concretely, getting your building FHA approved can open up your building to almost twice as many potential buyers. In this market, even one (1) extra potential buyer is worth the effort. More potential buyers mean more showings, more potential offers, the chance of higher offer prices and more sales in your building. Who does not want that?????

BUT what about the cost of getting your building FHA approved? THERE IS NONE! 

Yes, you need to gather some information together and get some forms filled out, but there are lots of friendly neighborhood bankers (like me!) who can assist you with putting together the application for FREE.

BOTTOM LINE: Today’s FHA borrower is just like you or me. This is NOT the new subprime borrower. In difficult financial times, FHA loans offer opportunities to borrowers with decent credit and good jobs. These are folks that you want as your neighbors. For Condo Associations and condo residents, having your building FHA approved is a “MUST HAVE”. FHA approval for a building opens up the unit to more good quality borrowers. This makes for more potential buyers and who does not want more buyers? All of this comes at a small cost to everyone involved!!

Who’s Who in Chicagoland Real Estate

I’m excited to be included in Chicago Agent Magazine’s 2011 “Who’s Who in Chicagoland Real Estate”.  It’s a stellar list of local real estate professionals – brokers, realtors, lenders, interior designers — who are finding success in spite of the challenging real estate market.  

http://chicagoagentmagazine.com/current-issue/vol-8-2011-2/whos-who-2011/james-pomposelli/

I love my work. My (extensive) background in financial services serves me well in dealing with complex mortgage transactions. The more technical, the better. But at the end of the day, helping realtors help their clients get the best possible mortgage is what makes my job worthwhile.

Hey, Can Someone Tell the Fed Inflation is Driving up Mortgage Rates…

With some good news on target inflation, mortgage rates went down last week for the first time in a few weeks. Honestly, the only person who is not surprised is our beloved Fed Chairman. You see, the Federal Reserve Bank, the institution who tries to manage rates for our economy, has been very much in favor of growing our economy and, for the first time in a long time, having economic growth with an increase in jobs. Unfortunately for the US, most economic recoveries over the last thirty years have not added jobs to the economy. They have been “jobless recoveries”. That happens when all the economic statistics say that they the economy is growing, but the jobs lost in the last recession don’t come back. It’s easy, lower interest rates, companies cut costs (jobs, usually lost overseas), the profits of the company come back from cost cutting and the economy recovers without the jobs coming back (they are still overseas). I will let folks who delve into politics debate if that is a good thing or not. I am here to say the story is different this time.

This time around, our beloved Fed Chairman, Bernard Bernanke, has decided that this economic recovery will have job growth (or at least an increase in real estate prices!). Unlike the past, the Fed Chair has kept rates low even as good economic data has indicated that the economy is recovering. But when I say that the Fed has kept rates low, keep in mind that I mean only short-term rates. You see, the Fed has control only over where banks borrow money in the short-term. Rates with maturities greater than a year are really set by the market, and the market bases its opinion on where rates should be on a number of things including global events, demand for risky or less risky assets, and most of all by INFLATION.

Over a month ago, the primary influence for mortgage rates was global events in Japan and the Middle East. As explained in this article (http://www.bankrate.com/finance/mortgages/japan-crisis-fed-send-mortgage-rates-down.aspx), mortgage rates went down because investors bought treasuries and mortgage-backed securities in a “flight to quality”. Well, after a nice little dip in rates and a bit of calm in the world, investors started to look for signs of inflation and those signs are not hard to find. With raging prices for oil and food (both called commodities), investors are concerned that overall price levels will rise (meaning: inflation). If an investor holds a bond, inflation is her worst enemy. Inflation means that the car you bought for $15,000 yesterday now costs $17,500 to buy the same one today. It is the same for lending. For example, the cash you lent yesterday for a 5% rate now costs you 6%. A bond investor is someone who lends money to a government, corporate, etc. If an investor holds a bond that she bought with a 5% interest rate, and she can lend the same money today at 6%, she is not very happy. In fact, the value of the bond she bought at 5% has just gone down in value because she can lend the same money at 6%. Investors hate inflation!!!!!!

Rising commodity prices have focused attention on the distinction between overall inflation levels and core inflation levels. Core inflation excludes the volatile food and energy components, so it is often viewed as a better indicator of short-term inflation trends by economists and Fed officials. While consumers certainly struggle with higher gas prices, longer-term inflation trends generally are more influenced by other factors such as wages and housing costs, which recently have increased very slowly. That is the Fed’s point of view now. The Fed wants as many jobs as possible so it wants the economy to grow as much as possible. The Fed is looking at core inflation and keeping short-term rates low.

But bond investors, other countries and pretty much everyone else is not buying it. Usually, inflation of commodity prices does not increase core inflation. Commodity prices go up and down but companies are afraid to pass along those costs to consumers for fear that their products will not be bought. But now and then, a long-term increase in commodity prices can lead to an increase in core inflation. If you have bought an airline ticket lately, you know that the increase in oil prices has caused an increase in airplane tickets. Generally, investors fear this is happening…or at least that it could happen. Bond investors are not the only ones who are concerned. Rate hikes in Europe and China to fight inflation raised concerns that the Federal Reserve was falling behind and letting rates stay too low, so mortgage rates moved higher.

In short, stronger than expected demand for commodities and violence in the Middle East have pushed energy prices significantly higher, but Fed officials forecast that this represents a temporary increase in overall inflation levels. Commodity prices are not expected to climb at this pace indefinitely. If food and energy prices stabilize, then the gap between overall and core inflation levels will likely shrink. For this reason the Fed has kept rates low for short-term bonds, but the market has not followed step. The concern that rising commodity prices will increase core inflation has led investors to demand higher rates on treasury bonds and mortgage-backed securities. This has led mortgage rates to inch up instead of staying the same or decreasing. Granted, rates are still historically low, but if you are waiting for that 4.5% 30 year mortgage, it is GONE, probably forever!!!! Investors know that the economy is not quite out of the abyss, but things are looking better and commodity prices make create a rapid increase in inflation.

We had a nice little dip in mortgage rates two weeks ago because the week’s tame inflation data eased some of the market’s concerns. The March Consumer Price Index (CPI) rose 0.5% from February, matching the consensus forecast, and was 2.7% higher than one year ago. Core CPI, which excludes food and energy, increased at a low 1.2% annual rate, which was a little lower than expected. After you get through the economic data lingo, we got some data last week that said that core inflation has not increased from commodity higher prices.

This is definitely good news, it will take much more of the same for investors to stop worrying about inflation. With such inflation concerns by investors, there is really only one way rates can go….UP, UP, UP! So what is the bottom line???????????

Well, if you are in a place to buy a home or refinance, rates seem likely to either stay the same or go down. It is anybody’s guess when an in the increase in rates will gain real momentum and the days of the 5% 30 year mortgage will be gone. If you are ready to buy that home or refinance, PLAY IT SAFE!!! Lock in your rate now because the only direction for rates is either flat or UP. If you are not quite ready, this historically low rate environment might still be here in six months. It could even be here in a year. Do not give up hope!!!!!!

The economy is not out of the woods yet, and there are no real hard figures on inflation. BUT the whole market is looking for any sign of inflation to raise rates AND you do not want to get trapped in a rapidly rising rate environment.

FOR IMMEDIATE RELEASE: Chicago Bancorp Hires Senior Mortgage Banker James Pomposelli

I have moved from Mortgage Direct to Chicago Bancorp. Same great service with lower rates and more programs. Please contact me with questions at 312-339-0024 or jpomposelli@chicagobancorp.com.

Please see press release: FOR IMMEDIATE RELEASE: Chicago Bancorp Hires Senior Mortgage Banker James Pomposelli. http://t.co/8ir2nHg

What has Uncle Sam done to Aunt Fannie and Uncle Freddie that will raise the cost of borrowing…now really is the time to refinance or purchase a home

As we all know, the last thing you can do in your blog is create a call to action. “You need to refinance NOW or you must buy a home TODAY” sound like something from a used car salesman. Especially since you cannot predict when rates will be at their lowest and you cannot guarantee when housing prices bottom out. You cannot time markets:  not the stock market, interest rates or the real estate markets.

However, there is a new reason that unfortunately is making now the time to refinance or buy a home. It is not the usual unpredictable factors such as interest rates, the economy, the job market, real estate values, availability of financing or any of the usual suspects. For the first time there is a real impetus to act NOW to refinance or buy a home.

It is the government!!!!!

In the aftermath of the financial crisis, the enormous number of foreclosures and the cost of supporting the mortgage market, Uncle Sam is going to raise the cost of borrowing by regulating the size of down payments and the fees charged by Aunt Fannie Mae, Uncle Freddie and the FHA. The White House and both Democrats and Republicans are all on board to make changes to the mortgage market, and the cost of getting a loan is going to increase for everyone.

So let’s take a step back and chat a bit about Fannie Mae and Freddie Mac. We all have heard the names of these government sponsored entities (GSEs), but what do they do? Before the financial crisis, Aunt Fannie and Uncle Freddie would buy mortgages that conformed to their standards (conforming loans!) and sell bonds that where backed by pools of the mortgages (mortgage-backed securities). The key was that Fannie and Freddie would put a full guarantee on the payments of the bonds. Because Fannie and Freddie were government entities, the markets felt that Uncle Sam would bail them out if something went wrong. This let Fannie and Freddie buy loans with very low down payments and loose credit standards. When the financial crisis hit, people realized that it was all smoke and mirrors, and Uncle Sam had to buy Aunt Fannie and Uncle Freddie.

Now, if that seemed like a bit too much to soak in. Here is the bottom line:

Fannie and Freddie made mortgages cheap for everyone. They did it with smoke and mirrors, and now the game is over! To make the market work without the magic, Fannie and Freddie are going to have to take less risk and charge more for the risk they take.

“The price of mortgage money is going to go up, and the availability of mortgage money may also be impinged,” says Keith Gumbinger, vice president at HSH Associates, which tracks mortgage data. Here are some arguments why the cost of a mortgage is going up.

Less Risk
Fannie and Freddie are adding new fees to loans to people with the best credit and raising existing loan fees. Freddie’s new fees start March 1, while Fannie’s kick in April 1.

Neither Fannie nor Freddie have been assessing fees on most loans for borrowers with credit scores above 720, even if the down payment was small. But citing a need to address risk and price their services appropriately, they will assess a fee of 0.25% to 0.5% of the loan value on borrowers with credit scores of 720 or higher who put down less than 25% of the purchase amount. The current fee for those with credit scores of 700 to 719 who put down less than 20% of the purchase price will double to a full percentage point of the loan value from half a point.

In addition, the Federal Housing Administration, saying it needs to bolster its capital reserves, is raising its required annual mortgage-insurance premium for FHA loans by 0.25% of the loan value. As a result, FHA loans—which are aimed at first-time home buyers and those with moderate incomes—will include an upfront mortgage insurance payment of 1% of the loan amount and an annual premium of 1.1% to 1.15% when the increase goes into effect on April 18.

For regular loans, private mortgage insurance—which is required when you put down less than 20% of the home’s value—is tougher to get than it once was. Generally, it is available only for buyers who make a down payment of at least 5% and have a credit score of 700 or higher.

More Restrictions
Earlier this month, the Obama administration proposed a wide-ranging overhaul of the mortgage market, including phasing out Fannie Mae and Freddie Mac, requiring a down payment of at least 10% and reducing the share of FHA loans, which are almost 30% of the market now, up from a historical market share of 10% to 15%.

Richard Peek, president of the Florida Association of Mortgage Professionals, says much of his business right now is in FHA loans, which allow down payments of as little as 3.5%. Requiring a 10% down payment, he says, would put homes out of reach for many Florida customers.

Privatization of Fannie & Freddie
Remember, both Fannie and Freddie are owned by the US government. As described above, both the Administration and both parties in Congress are aiming toward making Fannie and Freddie into private companies or creating a new private company to take their place (called privatization). This could have a serious impact on the accessibility and cost of a mortgage.

The Administration has put forth a number of possible options. The first of those would put the vast majority of the mortgage market in the hands of the private sector, where lenders would originate mortgages and securitize them without any government backing. The middleman role currently played by Fannie and Freddie would no longer exist.

The government’s role would be limited to the FHA and a few other smaller housing agencies, and their reach would be sharply reduced from current levels. The FHA backed 20% of all new mortgages last year. This is a truly private market 

The second option, championed by a handful of economists, would also create a mostly private market with a limited government backstop that would primarily become active buying or guaranteeing loans in periods when private lenders retreated during financial shocks.

The third option would create new privately owned companies to buy mortgages from banks and sell them as securities. Those securities would be explicitly guaranteed by the government as long as they meet certain criteria. The government would collect fees for that backing, just as the Federal Deposit Insurance Corp. insures bank deposits and regulates banks.

“The cost of mortgages is probably going to go up, and homeownership is probably going to go down,” said Daniel Mudd, the former chief executive of Fannie Mae who is now CEO of Fortress Investment Group.

Both of those things arguably could be a good thing for banks, but what about the consumer????????????????

Administration officials said the process of transitioning to a post-Fannie and Freddie world would take at least five to seven years, in part because the housing market remains too fragile. Many analysts say the process, which includes dismantling, moving, or resembling the firms’ infrastructure, could take even longer.

But in this politically charged environment with a Presidential election looming in 2012, it is hard to tell when changes will occur. Both parties have blamed the financial crisis largely on Fannie and Freddie, so Democrats and Republicans have a lot to gain by beating the drum on privatization and reform. With banks being so skittish now, nothing will prevent them from raising rates today to cover any perceived loss of profitability in the future.

RATES UP 1% and PROPERTY VALUES DOWN 10%
Mortgage rates could be one percentage point higher and house prices 10% lower if the U.S. mortgage market were fully privatized, according to a paper to be released Tuesday by Mark Zandi, chief economist at Moody’s Analytics.

Mr. Zandi argues that a purely public market risks putting too much risk on taxpayers because policy makers would be tempted to subsidize homeownership by setting mortgage-insurance fees too low.

A purely private market won’t work either, he says, because investors will assume that the U.S. government will intervene in a crisis. “No matter how much you talk about ‘no government backstop,’ when push comes to shove, the government will step in,” says Mr. Zandi.

Moreover, lenders would be likely to retreat or demand higher rates during financial shocks, exacerbating downturns. And lenders would be much less likely to offer 30-year fixed-rate loans at attractive rates, leading the majority of homeowners to opt for adjustable-rate mortgages. “I could be wrong, but I’m not sure it’s worth taking the chance,” says Mr. Zandi.

Because of the increase in rates, fewer people will have access to mortgage loans. With fewer buyers in the market to purchase homes, real estate prices will fall. In addition, a private company will need a lot more capital (that is cash) to run as Fannie and Freddie once did. The more cash that a company has to put towards making the mortgage, the more capital that the borrower will have to put down to get the mortgage. Consumers put their “capital” into a mortgage by making a cash down payment.

In simple terms: the more capital required by a private company to make mortgages, the larger of a down payment you will need to make. This again will limit access to mortgages. If you combine the decrease of borrowers from higher rates and down payment, you can see how there will be much less demand for real estate and prices could seriously tumble.



Bottom Line: As I have said time and time again, you cannot predict when rates will be at their lowest or at their highest. Neither can you predict when real estate market will hit bottom or begin to rise again. However, you can say that the government will only make it more expensive to refinance your mortgage or buy a new home.

Because of good old Uncle Sam, now is the time to act!!!!

It’s high noon at the OK Corral for home buyers. Sellers have dropped their guns (and their prices) to attract buyers!

Home values are falling at an accelerating rate in many cities across the U.S.

The Wall Street Journal’s latest quarterly survey of housing-market conditions found that prices declined in all the 28 major metropolitan areas tracked during the fourth quarter when compared to a year earlier.

Home values dropped the most in cities that have already been hard-hit by the housing bust, including Miami, Orlando, Atlanta, and Chicago, according to data from real-estate website Zillow.com. But price declines also intensified in several markets that so far have escaped the brunt of the downturn, including Seattle and Portland, Ore.

Where Housing Is Headed

 Because of the drop in housing values, there is a great deal of opportunity in the housing market for consumers. Millions of homeowners are in some stage of foreclosure or are seriously delinquent on their mortgages, and millions more owe more than their homes are worth. Real-estate agents are bracing for an uptick in distressed properties hitting the market, including foreclosures being sold by banks and homes sold by owners via a short sale, in which banks agree to a sale for less than the amount owed.

 

Sales of foreclosed homes are partly responsible for reducing home values because banks tend to cut prices quickly to sell the homes. Sales of foreclosures slowed in some markets at the end of last year as document-handling problems raised questions about their foreclosure processes. But that could change as banks pick up the pace of foreclosures.

 

Real-estate agents say that the threat of future price declines has led to a months-long standoff between buyers and sellers. With home values at such depressed levels, how much longer can this last.

 

Sellers historically have spurn what they see as low-ball offers, while buyers were demanding discounts because they are “convinced prices will drop further, and they don’t want to feel like suckers six months later,” says Glenn Kelman, chief executive of Redfin Corp., a Seattle-based real-estate brokerage that operates in nine states. The result is that “it’s high noon at the O.K. Corral on every single transaction.”

 

But more and more, sellers are dropping guns and their prices to meet the demands of buyers and sell their homes. Agents say that sluggish housing markets are requiring sellers to become much more realistic about setting prices that will spur deals.

After receiving no offers on a three-bedroom home in Oceanside, Calif., during the first week on the market, real-estate agent Jim Klinge convinced the seller to slash $30,000 from the price, to $420,000. That drew two full-price offers, and the home sold last week in an all-cash deal. “The drop in price was critical to reignite urgency for buyers,” said Mr. Klinge.

 

Since the housing bubble burst, there has never been a better time for buyers to take advantage of depressed real estate prices. Whether they are new parents or empty nesters, sellers know that they have to deal with the price levels that are in the marketplace.

So how can you be sure that you are getting the lowest possible price as a buyer. Well, there are two things going for you as a buyer. First, sellers have truly re-adjusted their expectations on prices and many of them have to make changes in their lives. Some sellers were able to put off a job change, birth of another child or downsizing their living arrangements for a year or so. After three years, people have to sell their homes because of life decisions.

Second, if you cannot find a property with a good price that is being sold by the occupant, you can find a variety of foreclosed or short sale properties. After paying the real estate taxes, electricity, heat and maintenance on their foreclosed homes, banks are starting realize that they are not really in the business of owning property. Banks that could not make up their minds on an offer or who moved at a glacial pace have now begun to act rationally and lower prices to sell properties. There are some absolutely beautiful foreclosed properties at bargain basement prices.

 

Well, that is all good news, but how do I know that I am buying at the absolute bottom? The truth is that you cannot time the market to find the absolute bottom. Stock, bond, mortgage and real estate markets cannot be timed. If you  try to time the market, you may miss out on a property that you love or worse yet, have prices rise as you wait!!!!!!

 

Bottom line: If you are ready to explore the benefits of buying a home, now is an amazing time to do it with low mortgage rates, realistic sellers and a large foreclosure market. There are deals everywhere. There are not guarantees that you will get the lowest price, but the odds are that you will feel good that your got a great home at a good value. It is the O.K. Corral, sellers have dropped their guns and buyers have a great shot at getting excellent values.