This is the year of the ascendancy of the sub-prime mortgage industry. These companies realized that there was a HUGE appetite for AAA rated mortgage backed securities. So they began to package and feed mortgages into these secondary markets (the two biggest of which are known as Fannie Mae and Freddie Mac) created by the investment banking companies on Wall St., who in turn pooled the loans and created high yield bond offerings for pension funds, sovereign funds, endowments etc.

Every step of the way, the loan companies and the investment banks (and the pension funds) are making huge fees and returns and everyone is STOKED! …and they just want MORE MORTGAGES TO BE WRITTEN, right? So the mortgage origination companies began to widen the scope of what would be considered an acceptable lending risk, and loosen the before now standard restrictions that have kept many from buying real estate in the past. They OPEN THE FLOODGATES, and it’s never been easier to get a mortgage. Regular banks get wild too, just to keep up–because like I mentioned, every participant in this system is stacking up tons of cash and getting bonuses and high fives from their bosses and wives and parents, etc.

You’ve all heard the story by now, I’m sure, but eventually, we get too loose, and have packed so many horribly risky mortgages into the system that it begins to crater. Now its late 2006, and real estate appreciation begins to flatten, and decline. Defaults explode, mortgage companies start folding, and the slow motion train wreck that is known as the “foreclosure crisis” comes to pass. In 2007 we actually realize that Fannie Mae is bankrupt, but the government realizes that having them close down is unacceptable for America, so the Bush administration tells Fannie and Freddie to continue operating even though they are losing billions every quarter.

So… now we’re caught up to 2012. Still working within the FNMA/FHLMC (fannie/freddie) system, but now NOBODY is making money or high fiving their bosses. FNMA’s CEO actually just resigned unexpectedly a couple weeks ago. Every loan that gets pushed into this system is now just another THREAT! And the GSE’s continue to lose billions every quarter.

As a result, we are all seeing underwriting guidelines that are just outrageously comprehensive in the level of detail required from borrowers. So I don’t want anyone to be discouraged from attempting the process, but just be prepared to PROVE everything! And the approval process is now completely income driven. If you are hoping to get by on strength of credit and assets, you will be disappointed.

Here’s the key concept for you, dear reader: The job of the underwriter is to organize and document the details of the borrower and the property in such a way that is acceptable to the GSEs, and the GSEs could basically care less if they take on more loan files!  You could even argue that THEY DON’T WANT THEM!  Its a very odd dynamic to say the least.

My main job as a loan originator is to set your expectations properly. So buckle up! Let’s take advantage of some HISTORICALLY LOW MORTGAGE RATES, and grab our opportunity to reduce costs, save money, and build equity together! I always tell my clients: if everything goes perfectly this will only be a minor inconvenience.

HARP 2 is supposed to completely get rid of any value requirements.  We’ll see if lenders jump in on this program.  I know of a dozen people off the top of my head that would benefit greatly from being allowed to lower their payments, get out of an interest only program and start the process of their own debt to equity improvement program.  Early indications are promising that this program will become available to borrowers trying to refinance underwater homes in Portland very soon.

In another area that has been recently restricted, we’re seeing indications that FHA loan limits will return to their former glory in coming days/weeks as well.  FHA loan limits were reduced this fall from $417,000.00 in our market to $362,500.   This is great news for any FHA loan holder who would benefit from an FHA streamline loan.  Right now, if your current loan is greater than this new FHA max allowable, you are stuck with what you’ve got (shy of cutting a big check at close).  With rates being at these amazing low levels, just about all FHA borrowers can be benefiting from a streamline.   Hang in there!  Help is on the way!!

The truth is that just about every borrower in the market could qualify to put less than 20% down if they chose to.  The FHA loan is one of the easiest loans to qualify for and it isn’t just for first time home buyers, nor is there an income cap on this program… and it only requires a 3.5% down payment, but I digress… let me break this down for you in internet-friendly bullet point fashion.

PRIMARY RESIDENCE LESS THAN 20% DOWN

• THE FHA MORTGAGE:  The trusty FHA — where would the world be without FHA mortgage insurance?  I hope none of us ever have to find out.  The FHA loan is the easiest of all loans to qualify for: it requires the least amount of cash, the least amount of credit history, allows for the highest debt to income ratios (which means “least amount of income”), etc. etc.  The FHA loan requires a minimum cash contribution from the buyer of 3.5% of the purchase price, has some of the lowest rates in the market, and carries an annual mortgage insurance policy of 1.15% of the loan amount per year/paid monthly.
• 3% DOWN “community” Mortgages: Private mortgage insurance is back in Portland.  We’re on the list of stabilized markets according to the PMI actuary peoples.  This means that if you have a good credit score and some cash reserves (retirement funds qualify for reserves), you can actually buy a house with only 3% of the purchase price required from the buyer.  PMI also allows for 5% down, 10% down and 15% down.  The more you put down, the lower the cost of that MI policy.  For an idea about how much each down payment costs in monthly MI please see my “mortgage calculator reference page“  This is for what is called “Borrower paid MI” which means the borrower pays for the mortgage insurance a little every month embedded into the monthly payment.
• LPMI / Lender Paid Mortgage insurance:  You can finance up to 95% of the value of a property with LPMI- which means that you can have the lender pay for your mortgage insurance.  This is reflected in an above market mortgage rate, but for many this approach makes a TON of sense.  Its better for shorter term holds or for those who might not qualify to deduct the mortgage insurance against their taxes.  The LPMI gives the borrower a better payment than BPMI, and also a better tax deduction.
• Zero Down loans: The USDA loan and the VA loan are the only remaining zero down loans in the marketplace (some credit unions have some very limited zero down offerings but I can’t really speak to that as they aren’t available for me to offer).  See my post on no money down loans for real estate in Oregon and Washington for details on how to qualify.
• The Homepath loan: The homepath loan allows for 3% down, and has NO mortgage insurance!  It also allows for 10% down on second home/vacation homes as well as 10% down for Investment property… all with no mortgage insurance! See my post on foreclosure financing loans for more information on the Homepath Loan.

So, what have we learned today?  Stop renting!  Call your realtor, and apply for a mortgage today!

***DISCLAIMER*** I am not an economist.  I have 9 years of mortgage lending experience and a Bachelors degree in communications from NC State University (Go Wolfpack).

Mortgage rates are directly derived from FNMA mortgage bond offerings.  This bond is sold just like any other bond, and competes with other municipal and corporate bond offerings.  The yield of this bond changes from day to day.  When the overall economy is “good,” this yield generally comes UP to attract investors (competing against stocks)… when the economy is poor, this yield comes down, as investors want to buy these bonds for “safety” (bonds are considered safer investments than stocks)… and when investors want the safety, the bond makers don’t have to offer much yield to get a purchase right?  Mortgage rates are based on this specific bond yield… yield goes UP, rates go UP… yield goes DOWN, rates go DOWN.

Regarding this current political debate on the debt ceiling, my thought is this: If the United States goes into default, this could trigger a ratings downgrade for our government bond offerings.  This downgrade would undoubtedly pressure bond yields AND mortgage rates higher, and this change could happen quite rapidly, to the tune of .375-.625% swing in RATE.

Conversely if we somehow make a “grand deal” to raise this ceiling and avoid a downgrade, we could see markets normalize, and even improve (in terms of mortgage rates).  Global economic news is all extremely “bond friendly” still, and once we get the ceiling raised, I would expect continued, steady and stable and VERY low mortgage rates.

The FHA mortgage continues to be one of the most popular mortgages in Portland.  The reason for this is undoubtedly its FLEXIBILITY.  The FHA loan is the easiest to qualify for, requires the least amount of cash, has the lowest credit requirements, allows for gift funds on the down payment, allows for non-occupying co-borrowers to fully count towards the DTI, the list goes on.  But once you’ve GOT the FHA loan in place, the flexibility continues!

For one, the FHA loan is always “Assumable”.  This means that when you want to sell your home, you can also offer your mortgage to be assumed by the buyer (provided they qualify with the lender, etc).  Imagine how much value that might have in 5 or 10 years when rates are at 7%… or maybe the 30 year fixed mortgage won’t even EXIST in a decade?!  How attractive will it be selling your home with 20-25 years remaining on a 4.5% fixed rate?  So, assumability is a great value added feature on the FHA.

The other really cool thing about the FHA loan is the “FHA Streamline Refinance” program.  The Streamline is nice because you don’t necessarily have to get an appraisal (there is an option to get one with an appraisal, but in this market that hasn’t been the smart option).  So if you’ve lost some ground on your equity, you can still qualify to take advantage of lowering rates…. Except not really this year.

Even though FHA rates on the 30 year fixed are approaching 4.25%, many FHA loan holders with rates in the low 5% range won’t qualify for any savings.  The reason is because of the increase in the FHA mortgage insurance premiums that took place this spring.  A year ago, FHA monthly MI was based on .55% of the loan amount annualized, and now that has more than doubled to 1.15% per year.

Long (and let’s be honest: boring) story short- Even though the rates are lower, your payment won’t be lower.  I took a look at a refi for a client in a 5.25% FHA fixed rate.  If we lowered him to 4.5% but added the NEW mortgage insurance structure, we only saved ONE DOLLAR per month!  You wouldn’t even be able to get the loan if you wanted!  The FHA streamline requires a minimum payment improvement.

So I know many of you reading this have received very official looking and super attractive refinance offers in the mail, let me assure you that its probably too good to be true.  If you would like a quick analysis on YOUR FHA loan to see if you would qualify for the streamline program, please do not hesitate to fill out the “online rate quote” form found at the upper right of this site.

I have a target in mind (anywhere between 1% and 2% of the loan amount for the pre-split fee), but depending on what makes the most sense for the borrower, and depending on how aggressively this borrower negotiates what he or she is willing to pay for a loan, we arrive at a fee structure that works for everyone and move forward.  The thing that makes our government uncomfortable is the fact that banks/lenders pay loan originators based on the profitability of each mortgage created.  In other words, the higher the rate offered, the more the originator would be paid (usually).  Our government thinks that this creates the wrong incentive for me as a mortgage lender, and frankly, they might be right.

The crux of the new regulation for mortgage lenders is that we can no longer be paid based on the loan’s profitability.  We are now required to be paid a uniform flat fee per loan closed no matter what!  So now, instead of having a slight tension between mortgage lender and borrower around loan fees, the tension will be re-oriented to mortgage lender and the mortgage company for which he or she works.

It just became significantly more risky to own a mortgage operation.  Think about that for a minute.

Now, instead of only dealing with splitting profits or just NOT doing a loan, a company has to pay the mortgage lender for a closed loan, even if the loan was not structured profitably.  Some mortgage companies will be faced with the risk of funding loans that generate less profit than they will be required to pay their loan officers.  In order to alleviate that risk, I predict that lender compensation will be embedded into new rate sheets.

There is a LOT of negativity around this change within the industry.  Personally, I’m just rolling with it… I love what I do, and I don’t feel particularly threatened by this change.  I do think that the ultimate result of this change will have to be upward pressure on the cost of financing (if anything… it could be a whole lot of nothing).

I just got a look at the new compensation plan for my company Mortgage Trust, Inc. and I’m proud to say that our correspondent lending structure, along with our smaller size has created a circumstance where we can retain this flexibility for our clients. Additionally, we are committed to surrounding our clients with value added financial coaching, and long term financial strategy during and after a mortgage process. Our pricing is always competitive, but now when you see a report showing how some simple active debt management can save you tens of thousands of dollars over a 10 year period, all this other stuff starts to matter a lot less!

The timing of this QE2 has proven to be quite horrible in the short term for mortgage rates.  The purchasing began right at the same time that some strong signals of an improving economy arrived in a variety of places.  This created a fear of inflation for the first time all year which put a scare into the bond market, and drove rates up (11/12/2010 -  11/15/2010 to be exact) our first HUGE shift towards higher mortgage rates.

And then just yesterday (Dec 1, 2010), we had some very strong job growth numbers combined with news that the US government would also participate in purchasing EUROPEAN BONDS.  This is a horrible and unpredictable double whammy of pain for our mortgage rates.  I was looking to European economic weakness as something that would cause a “flight to quality” bump for our mortgage bonds… and now the flight appears that it may be AWAY from the US and into Europe.

Anyway –  rates continue to be super low, but the sub-4% fixed rates may be on their way out, maybe forever.  The low rate party is now having a change of tone,  the energy level is lower, and lots of fun people have gone home.  I continue to expect a correction, but every day that it doesn’t come is making both the chances of a correction lower, as well as the size of the correction.  Please CORRECT! Come back to this party! I wish it would never end.

I have no real opinion about QE2.  I am only interested in it as far as it effects my little mortgage universe.  But that said, it appears to be having a positive effect on our economy.  I’m happy to host any conversation here about QE2 if someone wants to make a comment.  I’m all ears (digitally speaking).

*INCOME REQUIREMENTS TO QUALIFY:

- Families of 1-2 must make less than $71,200/year
- Families of 3 or more must make less than $81,880/year

Here is how it works:

If you are reading this and you didn’t already know — the interest paid on your primary residence is a tax deduction.  This means if you pay 10k in interest per year, the deduction would equal 10k of your income that you wouldn’t have to pay taxes on — it becomes TAX FREE INCOME.  If you are in a 25% marginal tax bracket, this translates into $2,500 in real dollars to you.  The MCC converts the first 20% of this deduction to a a tax credit. This means a dollar for dollar refund to you!  So for the same homeowner with 10k in interest to work with, the MCC would translate into $2k cash back PLUS the remaining 80% as a deduction, or $1600 totaling an annual refund of $3,600, an almost 50% increase in tax benefit.

This benefit lasts for the ENTIRE LIFE OF THE MORTGAGE.

Only if you sell or refinance, would this benefit end.

There are some things to consider as well:  There is a potential “recapture tax” for those who SELL the property in the first 9 years.  If your income exceeds the maximum threshold at the time of sale (during the first 9 years), you could be forced to repay the city for the benefits received from your home’s profit.  Please call me for details, and for more analysis about how this special first time home buyer program in Portland, OR could work for you.

Mortgage Trust, Inc. has been allowed to offer this MCC program in partnership with the city of Portland, and I have taken the class certifying me to consult with home buyers about it.

Also — Please refer to Portland Housing Bureau for more details about this program.  Please also note that there are two designated “target areas” in NE Portland that qualify home buyers for the MCC even if you ARE NOT a first time home buyer.

The Oregonian just published an article about this MCC first time home buyer program in Portland.

Read more about first time buyer programs in Oregon.

- 5% down conforming

- 10% down conforming, and

- 2 FHA options

One FHA option is the current FHA cost structure, which has been in place since April of 2009.  The other option is the new FHA cost structure, which becomes unavoidable after October 4th of 2010.  FHA mortgage insurance has always been paid in two places on the loan:

1. The monthly premium (which is discounted based on a large upfront lump sum), and
2. The Upfront Mortgage insurance Premium (which is 2.25% of the loan amount and automatically added to, and financed into the life of the FHA mortgage.

The major change starting Oct 4th 2010  is a shift of the mortgage insurance cost away from that  “financed upfront premium” and more towards the monthly premium.

In short — FHA loans are about to become a little bit more expensive.

I have prepared an interactive FHA loan report that shows the breakdown more clearly.

The new Upfront FHA mortgage insurance premium will be reduced from 2.25% to 1% of the loan amount.  However, the monthly mortgage insurance cost will almost double — being increased from 0.55% annually to 0.90% annually.  In my example above, this shows up as a jump in payment of $69 per month on the same $300k mortgage.

Ultimately, FHA loans are still going to be amazingly popular, and continue to make a lot of sense for borrowers as we move forward.  They still have the smallest available down payment requirement (at 3.5%) as well as the most flexibility around borrower credit history.

But I do think that this change will make a loan with 5% down and private mortgage insurance more attractive to borrowers with top credit scores.  Additionally, the FHA streamline refinance will become much less attractive for many borrowers.  I am scouring my client list and the wider community for last minute FHA streamline refinances! Last call for the good stuff!