Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – Oct 28th, 2008

FHA Is KING!

I thought I’d take some time to reflect on just what exactly is currently available to home buyers.  I often get asked, “Is anybody doing loans right now?”  The answer is unequivocally, “YES!”  Basically, we’re back to the old days of two’s!  Two paystubs to give us a month’s gross income, two months bank statements to be certain that a client’s down payment and closing costs are “seasoned,” two years’ W-2’s and two year’s 1040 Tax Returns.  Whereby in the past eight years my office’s FHA applications ran from about one to two percent, we’re now funding over sixty seven percent FHA loans.  I’d like to go over a few things that you should know about FHA and some other recent changes that the housing market is going through.

New Underwriting Guidelines

FHA stands for Federal Housing Administration.  They are a division of Housing and Urban Development and their goal is to help administer the funding of loans for home buyers.  They have changed their guidelines, recently, and most of the guidelines will go into effect in January of 2009.  One of the biggest is their requirement will go from three percent to three and one-half percent, of the sales price, as a down payment.  The other major change will be the mortgage insurance premium that is financed into the loan amount AND the monthly mortgage insurance payment.  These will vary with a clients credit risk score.  FHA finances an upfront mortgage insurance premium.  It will vary from 1.25% to 2.75% of the loan amount depending on credit risk scores.  Basically, if you have great credit, your up-front mortgage insurance premium will be 1.25% of you loan amount.  Let’s take a $200,000 purchase.  In January, you will be required to put three and one-half percent down, so your base loan amount will be $193,000.  Now, what’s great is that that down payment can be a gift from a family member.  So we know that the financed up-front mortgage insurance premium will vary from $2,412.50 to $5,307.50.  This amount is added to your base loan amount of $193,000 for a total loan amount of $195,412.00 to 198,307.00.  So, obviously, if you have a good credit risk score, your payment will be based on the lower total loan amount.

Qualifying Is Quite Easy

Qualifying for FHA is still pretty easy.  Your application is put through an automated underwriting engine that determines your eligibility.  With higher credit risk scores, more of your income can be used to qualify you for a house payment.  There are still opportunities to qualify with approximately fifty percent of your gross income going toward all of your monthly liabilities, however, some good factors to use would be thirty-five percent of your gross income going toward your housing costs and about 45% going toward all of your monthly obligations.  These are tighter qualifications that we’ve seen in the past, however, still pretty flexible.

Freddie Mac Changing Too

FreddieMac announced this week that they are only allowing 45% of a borrower’s income to go toward ALL of their monthly obligations.  This is a major change from their automated underwriting engines approval loans with 80% and more of someone’s income qualifying them.  Freddie used to have an “accept +” status that didn’t care what the qualifying ratios were, as long as a client had extremely high credit risk scores.  Expect to see more changes, but we’re in a market that needs to correct itself and these are responsible ways to do so.  It will take some time but it’s a step in the right direction.  If you have the supporting documentation to qualify, it’s just an excellent time to buy.  Values and rates are still low.  See you next week…

Chico, CA Interest Rates Market Report – Economic Influences – Sept 9th, 2008

HOLY … #&*@!

HOLY…Toledo!  Treasury Secretary Henry Paulson announced that the Federal Government would have to take over control of Guaranteed Service Enterprises (GSE) Fannie Mae and Freddie Mac.  HOLY Mollie!  Holy guacamole!

First of all, what does this mean and why did it happen?  To put it bluntly, Fannie Mae and Freddie Mac just got too big!  They got to do whatever they wanted, pumped tens of millions of dollars into the lobbyists that asked congress and the senate to look the other way when it came to making decisions on determining a consumer’s ability to make mortgage payments.  Things are good, why change a good thing?  And then the mortgage credit crisis hit…and things started to change.

Surprise Takeover?

The takeover is not too much of a surprise.  We’ve already seen some intervention when the Federal Reserve stepped in to bail out Bear Stearns.  But this is the largest expansion of government in the history of the United States.  This is big!  This is HUGE!  Hence the “holy guacamole” quote from the first paragraph.

Last Wednesday, we saw the Dow Jones Industrial Average plummet 300 points.  Also, we heard from portfolio manager Paul McCulley of the single largest purchaser of mortgage backed securities PIMCO come out and say that they were finished buying any more bonds.  Also, Friday, governments from around the globe mimicked McCulley and the stage was set.

Rescuing An Industry

Anyone remember the Savings and Loan Crisis of ‘89 and ‘90?  Again, the government had to step in and create the Resolution Trust Corporation to monitor the assets of failed banks, put $300 – $400 Billion tax payer dollars into a wrecked system, but later re-coupled about $225 Billion of those funds…but it rescued an industry.

That’s what’s happening here, folks.  The government had to step in and rescue an industry that would have collapsed…period!  If the GSE’s could not have sold their bonds (or mortgage backed securities) than they would have continued to lose capital until they had nothing left.  Now, conforming loan amounts (loans with values of $417,000 and lower) will stay liquid, as PIMCO announced on Monday that they’ve been, “buying all weekend.”

All Is Good…But What About Long Term Effects?

So, for the short-term, this is great.  It helps free up funds for banks to operate, but we cannot forget that we’re still dealing with tighter credit standards for loans, a slowing economy, people can’t qualify for loans to buy homes, etc.  So this isn’t a quick fix…it’s just the ability to enable us to continue to operate.  We still exist as opposed to the collapse of an entity.  Fannie/Freddie created the ability for conforming loans to have an open ended line of credit ($200 Billion) that would guarantee to investors a place to be able to place their loans and get a return on their investment.  If we need more; than it will just take an act of Congress to approve more.

Hard Lesson Learned

Frankly, I think this is what government is for.  Some would argue that it gives too much power to the government.  Maybe it does.  But put in the hands of greedy CEO’s and stockholder’s of banks and savings and loans…hard lesson learned.  Hard lesson learned!

Rates have benefited from this and may continue to do so in the short term.  Government will eventually release more management to the GSE’s as time goes on and the Private Sector will benefit from this also.  So…until next week!

Chico, CA Interest Rates Market Report – Economic Influences – August 5th, 2008

Big Changes On The Horizon

This week I’m going to be extremely brief with my comments on the economic reports and educate you a little about major changes in the real estate lending market.  So, let’s rock and roll!

First, the government lifeline extended to FannieMae and FreddieMac was signed into law by President Bush.  I’ll be addressing that in forthcoming issues.  Second, 2nd Quarter GDP come in at 1.9% while expecting 2.3%.  Previous quarters’ numbers were also revised lower.  Third, initial jobless claims shot up to 448,000.  This is a huge number, however, is somewhat misleading, as the government has laid out a new federal benefits program that will manipulate this number for about a month…interesting…Fourth, a better than expected jobs report showed we only lost 51,000 jobs.  WooHoo!  Unemployment moved to 5.7% so the better than expected jobs numbers, that’s right a loss of 51,000 is better than expected!  Fifth, I told you I’d report on the Fed’s favorite inflation gauge, the Personal Consumption Expenditure Index.  Core PCE moved to 2.3%.  This is outside the governments comfort zone of 1.0 – 2.0%.  Last, the Fed left the overnight rate unchanged at 2.0%.  They did indicate that they felt like inflation pressures should start easing toward the end of this year, however.

BIG Changes in Mortgage Insurance

The changes that have occurred, as of August 1 of this year, is in regard to mortgage insurance.  Years ago, you couldn’t buy a home unless you had twenty percent down.  Mortgage Insurance (MI) companies got involved and said if you let someone put five or ten percent down, they would insure a percentage of the loan amount.  This enabled more people to buy homes because they didn’t have to wait longer to save twenty percent.  This past week four of the seven major mortgage insurance companies changed their guidelines.  Basically, if you do not have a credit risk score of 620 or higher, you’re not getting a FannieMae or FreddieMac loan unless you put twenty percent down and avoid mortgage insurance all together.

FHA Will Return As “King Of The Loans”

Only one MI company left enables you to put five percent down.  All others are requiring ten percent down.  So, if you know of people that only have five percent down, make sure they continue to call other lenders if their lender is telling them that they HAVE to put ten percent down.  And there are a lot of major banks that are not approved or not contracted with this one, MI Company!   Refinances on investment properties will have to have twenty percent equity in the subject property.  Also, if more than 55% of your income is going toward all of your monthly obligations, than you can not qualify for a loan with mortgage insurance.

Monthly Guideline Changes

Now, these changes are changes to July’s changes.  We are seeing guideline changes on at least a monthly basis, sometime weekly.  Make sure you’re working with an expert in the field that follows these changes closely.  Also, make sure you have an option to work with an FHA expert!  FHA has new guidelines taking effect on January 1, whereby the buyer would have to put 3.5% down as opposed to the current 3%, but they have more flexibility regarding their qualifications than MI companies.  Until next week…

Chico, CA Interest Rates Market Report – Economic Influences – March 25th, 2008

OFHEO relaxing Fannie/Freddie Reserve Requirements

The Office of Federal Housing Enterprise Oversight (OFHEO) announced that they, in fact, are rescinding the capital restrictions placed on FannieMae and FreddieMac.  This will put $200 Billion back into the market enabling these firms to buy mortgage bonds.  That news really helped interest rates this past week, even with the lowering of the overnight rate by the Fed. 

Bear Stearns Buyout Moves From $2 to $10 per Share

Another good thing that happened was a report from Morgan Stanley that their earnings showed a nice profit of $1.45 per share.  This was much better than the expected $1.03 per share.  Together with Goldman Sachs and Lehman Brothers showing fantastic earnings reports, this helped settle fears in the banking world and gave evidence to support that the Bear Stearns take-over bid from them not being able to make their margin calls, was actually an isolated incident.  Then, later in the week, stocks surged on the news that the $2 per share buyout of Bear Stearns was being raised to $10 per share. 

After the Fed lowered the overnight rate by .75% here’s what their statement said, “Inflation has been elevated, and some indicators of inflation expectations have risen.  The Committee expects inflation to mo9derate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization.  Still, uncertainty about the inflation outlook has increased.  It will be necessary to continue to monitor inflation developments carefully.” 

Rates Up On Lower Overnight Rate, Then Down On Reserve Lowering

Keep in mind that we’ve been telling you about mortgage bonds not really reacting too favorably after a Fed cut of the overnight rate.  In fact, after this last cut, mortgage bonds moved down (so their yields and interest rates moved up) 120 basis points.  What eased their concerns was later in the week, when OFHEO mentioned their lifting of the capital restrictions on FannieMae and FreddieMac.  So, just when you think rates are going up again, they settle down with yet another historic move by the Federal Open Market Committee.  Truly unprecedented and remarkable actions that this Fed has managed to maneuver into one of the worst financial situations to ever hit the United States! 

We keep mentioning Jobless Claims.  Remember, the last two recessions that the United States was in, the four-week average of Initial Jobless Claims was reported at 362,000.  Well, this past week we hit a slamming 378,000 for the week.  This brought the four-week average to an astonishing 365,250.  We’ll continue to report on this, perhaps weekly. 

A Three Year Level of Resistence Hard To Break Through

It’s a good time to cautiously watch interest rates, and generally, I would say to lock in on any rate below six percent.  We up against a truly tough level of resistance that we haven’t seen in three years, so it would be difficult to climb above this area and have much better rates.  So; up and down, back and forth from 5.5% to 5.875% (APR 5.718% & 6.019%, respectively). 

What was a nice surprise was the housing market numbers.  Existing Home Sales for February were reported at a better than expected rate.  This hurt interest rates a little, but it is a sign that buyers are realizing that it’s an excellent time to get into a home.  Then the Consumer Confidence numbers appeared which helped rates.  This report was at a 35 year low.  Until next week…