Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – January 8th, 2008

The Economy Much Worse Than Thought

FHA Mortgage Insurance Changes

“Capitalize on this good fortune…one word can bring you round…Change!”  In the words of Jon Anderson and “Yes” we’ve seen quite a lot of changes for the year, and I’m certain that there are a lot more to come.  After a couple of weeks off with the family, here’s what’s happening.  First, remember when I touched on the FHA mortgage insurance factor changing?  Well, that has gone into place.  There is a table that indicates what a borrower’s mortgage insurance premium will be depending upon where their down payment comes from (gift, savings, etc.), what the loan to value is, and what the client’s credit risk score is. 

“Declining Market”  Get Used To That

Another extremely important change was the fact that FannieMae labeled Butte County a “Declining Market” area.  What that means is that they feel as though values are continuing to decline in our area, so, to protect themselves, they are lowering the maximum loan to value guideline by 5%.  For example:  Let’s say that Steve is interested in purchaseinga home for $180,000, but only has funds for closing costs.  In December, FannieMae would have allowed the client to obtain a loan for $180,000 because the maximum loan to value was 100%.  Well, since December 31, the lender would now only finance 95% of the value of the home because of the declining market status.  On a side note, FreddieMac is still enabling 100% loans in our area for the time being, however, all seven of the mortgage insurance companies that insure these loans on the west coast may change this in the near future. 

More Documentation…Get Used To That

Also, FannieMae is tightening up on their underwriting guidelines and making it a little more tedious to document someone’s qualifying.  One example is that I received an approval on a self-employed client this week and the lender asked for a profit and loss statement from the client.  I haven’t been asked to have a client provide one of those in about five years.  So, really, no big deal…you supply a P&L and move on.  That’s the attitude that people have to have right now…otherwise, you won’t have cool little songs in your head that you can whistle out loudly like, “Changes.”

Riskier Based Pricing

Also, conforming interest rates have new add-ons to their cost as of the first of the year.  And, just like the FHA add ons for the Mortgage Insurance Premium, it’s an add of to the cost of the loan.  For Example:  I locked a client in at 5.75% on a cash-out refinance in November.  They have a 640 Credit Risk Score, but we received an approval.  This month I locked a client in with the exact same scenario.  The “change” was that the sales comps for the same size home were now eight months out, instead of the desired six months, so the value had come down slightly.  However, this pushed the loan to value up, beyond 70%.  That’s an add-on of 0.5% points.  Then, the clients FICO, or credit risk score, was 640, so the add-on for that is 1.25% points.  If their FICO was 660 it would have only been .75% add on to the points.  So, pricing a loan has become a full-time job for one of our staffers! 

The good news is that interest rates keep coming down.  The economy may be in more of a slump than some thought…and it’s still, just an excellent time to buy.  Until next week…