Oregon Mortgage Blog » Mortgage Rates

Why is Mortgage Underwriting So Crazy?

James — Wed, 25 Jan 2012 22:59:09 +0000

Why is the loan approval process so difficult these days? Well, the answer is complicated. The truth is that the approval and funding process for a conforming, FHA, or VA, government insured mortgage has never been more complex since I’ve been in the business (since 2003). To get to the root of this issue we need to get into the way-back machine and go back to the year 2004.

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.

Operation Twist = Mortgage Rate Bonanza

James — Thu, 22 Sep 2011 18:47:01 +0000

Yesterday’s announcement from the Fed’s quarterly meeting was a major market mover–especially for mortgage rates. Ben Bernanke announced the initiation of something called ‘operation twist’, which many market observers were prepared for, but my understanding is the tone of the announcement really made the bond market jump to levels never before seen, with the result being the lowest mortgage rates ever seen in the US. I get some great information from a market analyst in the Chicago area named Doug Nardi, and I’m copying and re-posting his assessment for you, here:

The Federal Reserve’s Operation Twist was everything it was cracked up to be, and even a bit more. While the stock market was less than impressed with the central bank’s latest stimulus plan, the bond market was all for it. The Fed announced it would direct $400 billion from the sale of treasuries of three years and less in duration and invest it in those with maturities of 6 to 30 years.

The total was about $100 billion more than expected and an indication that the Twist–which seeks to lower long-term borrowing costs (mortgage rates mainly) by compressing the yield curve for government debt–was on in a big way. Listed below is an excellent synopsis from our research partner ISI of today’s Fed actions.

Highlights:

1. Summary – The Federal Reserve decided to engage in operation twist as widely expected. The size, however, at $400 billion, was larger than expected. The Fed also decided to reinvest proceeds of maturing agency and mortgage securities into more mortgages instead of into Treasuries. The Fed’s outlook is bleaker than last time, with now “significant downside risks.”

2. Growth Outlook – There weren’t many significant changes in the first two paragraphs of the statement, but the assessment that risks are now significantly to the downside is notable. Overall, the Fed has probably further reduced its expectations of what growth is likely to be in coming quarters.

3. Inflation Outlook – No concern at all on the inflation front. The statement said that “inflation appears to have moderated” from earlier in the year, even if the most recent CPI is at 3.8%. The Fed thinks that the combination of a weaker economy and the recent decline in commodity prices will result in lower inflation going forward.

4. Policy Stance – The Fed decided to sell $400 billion of Treasuries with remaining maturity of 3 years or less and to buy the same amount of Treasuries with maturities of 6 to 30 years. According to the table released by the NY Fed, re-investments will be as follows: 32% of the total between 6-8 years; 32% between 8-10 years; 4% between 10-20 years; 29% between 20-30 years; 3% in TIPS between 6-30 years. The amount in 20-30 years is larger than expected, hence the large drop in the 30 year Treasury yield.
The Fed also decided to reinvest the proceeds of maturing agency and mortgage securities in other mortgages instead of in Treasuries. The estimated amount is about $20 billion per month or maybe slightly more, depending on refinancing activity. This could be significant because it could lower mortgage rates by reducing the spread of mortgage securites to Treasuries.

The Fed maintained its conditional commitment to keep short rates very low until at least mid-2013.

5. Looking Ahead – The Fed maintained an easing bias, so it is prepared to do more should the economy not improve. At least part of that may come through the communication of what it will take for the Fed to raise rates. The aim would be to make it clear that rates will not increase for longer than the 1.75 years currently in the statement. That should keep the yield curve lower and anchor yields even beyond two years, thus further motivating investors to buy risky assets. We will have to wait for the minutes of the meeting and other communications to see if this is something we can expect to see happening in the relatively near term.

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What this means for mortgage holders is that this week is an unprecedented opportunity to lower the cost of your debt. Don’t forget that lowering your rate gives you two choices:

1. You can have more money each month to direct to other debts or future savings/investments, or:

2. You can accelerate the payoff of your mortgage entirely.

How Does the Debt Ceiling Affect Mortgage Rates?

James — Fri, 29 Jul 2011 05:17:21 +0000

This debate is unavoidable, so I won’t try to establish any context for this blog post. I’ll just try to keep this very simple for those of you who are searching for some quick perspective on how this current debt ceiling debate might impact residential mortgage rates and fees.

***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.

Low Rates and the Return of Private Mortgage Insurance (PMI)

James — Tue, 17 May 2011 17:19:27 +0000

Its happening again. Rates are tumbling and tumbling more. I read recently that avoiding closing costs in a declining rate environment is a wise approach and I completely agree. By avoiding closing costs two things happen:

1. The net benefit of the improved cash flow is immediately realized, and

2. You are in a position to refinance AGAIN as rates continue to slide. Because you haven’t paid any of your equity there is not much downside.

I’ve been making loans since 2003, and rates have pretty much always been really attractive with a few exceptions (sorry purchasers of the summer of 2006! I hope you’ve refinanced out of your 6.625% fixed).

Something else is brewing that I think bodes well for our real estate marketplace: the return of Private Mortgage insurance, aka PMI. PMI has been on the sidelines in recent years. This isn’t surprising because when homes default, the banks cash in their PMI policies. You see — PMI is to protect the BANKS not the borrowers. PMI is good for borrowers and home owners because it ALLOWS lenders to lend and borrowers to buy, which is obviously critical.

Since 2007, mortgage insurance has been deductible for families with annual incomes less than $105k (DEFINITELY consult a CPA to confirm this — I’m just some jerk mortgage blogger), so there are a lot of reasons why I am very happy that mortgage insurance exists. Anyway — as property values declined in recent years, MI companies were requiring more equity and charging higher premiums. That is all reversing now!

This is particularly good in light of the recent increases in FHA mortgage insurance (which is now 1.15% of loan amount annually for ALL FHA’s). It appears that the PMI companies are jumping back into the market place to provide lower cost options for borrowers. So even if you only have 5% down — a conforming loan with PMI will likely be a better loan for you than the FHA — but ONLY IF your credit score is high.

Thank god for the FHA loan too — It will ALWAYS be a great loan to consider for a variety of reasons… But now there are some very compelling alternatives that borrowers should be looking at.

Potential Jumbo Refinancing Candidates

James — Fri, 28 Jan 2011 20:03:25 +0000

So, if you pay attention to this blog, you know that interest rates have popped up from their mind-boggling lows in early November. Mortgage Refinances still make a ton of sense for many, but some are waiting for a return to the glory of those heady days… and I believe they will continue to wait for a long long time. However, there are two types of borrowers that I believe will still benefit GREATLY from a refinance:

Those who tried to refinance and couldn’t qualify due to an appraisal issue.
Those who currently have a Jumbo mortgage and think that Jumbo rates haven’t improved enough to warrant starting the process.

This second group has the potential to create the most savings BY FAR and here’s why: I have recently gained access to a low rate FIXED second mortgage that is creating a lot of added flexibility to what I have been able to offer.

There is a new regional lender that has aggressively entered the SECOND MORTGAGE market place, and is allowing a simultaneous close to a first loan, and they go to 90 LTV in many instances. This means for those who tried to refinance but the appraisal didn’t quite work now have the ability to fund a low rate fixed first simultaneous to a low rate fixed second one. This second mortgage has been locked by me as low as 4.99% (APR 5.251%), and this loan has NO Balloon Payment! This means that it acts exactly like a 30 year fixed first mortgage.

What this also allows current Jumbo loan holders to do is break their mortgage into two, 30 year fixed loans, capping their first at $417,000 (the conforming maximum), and simultaneously closing this second loan to make up the difference. This works extremely well for loans up to about $760k.

So, the best Jumbo Refinance in Portland is to get OUT of your Jumbo loan entirely. Access the super low rates of current non-jumbo mortgages and close with this low rate fixed second. My most recent client who qualified for this will save over $1200 per MONTH.

This works great with a refinance, but also works for a purchase, too.

Lets get started! Visit Portland Home Loan for more information.

Mortgage Rate Volatility and the End of the Refinance Boom

James — Thu, 02 Dec 2010 20:12:34 +0000

Kind of feels like an epic hangover. The low low rate party that seemed like it would never end, has come to a decidedly abrupt change in direction. The sunlight is streaming into the windows, our clothes are all wrinkled, and there are spilled drinks and confetti everywhere. We’ve seen a handful of days in the bond market this month that have been extremely precipitous in speed and size of the deterioration. Since April of 2010, every time I have locked a loan it has been a bittersweet and slightly regrettable experience. Of course every loan must be locked at some point in the process, but it was a strange new frustration to see rates improve so steadily and relentlessly. We would lock and fund, and then within a day or so rates would just get better. I got in the habit of floating everyone for as long as possible to capture as much of the improvement as we could. The grand finale of this downward trend appears to come in with the US Fed’s second round of Quantitative Easing, aka “QE2″. My initial thought when the announcement was made was that this would be great news for bonds (when the government announces that it will purchase $600 BILLION dollars worth of bonds in the coming 6 months, its usually a clear indication of good bond news). While good bond news is usually great news for mortgage rates, this time was the exception. You see, the government buying money from itself is another way of describing “printing money” to add to our economy… This is an inflationary act, as adding money to the system makes all the other money a little less valuable. Inflation is always HORRIBLE news for bonds, but lately since the economy has been so pathetic, these inflationary actions have actually NOT produced inflation (but the “potential for future inflation” is another story).

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).

7 Critical Things to Avoid During the Loan Process

James — Wed, 15 Sep 2010 23:40:52 +0000

Our new credit environment is fast becoming one of extremely rigid guidelines. Your ability to obtain a mortgage is dependent on the financial scenario presented in the loan application. Think of this application as a snapshot of your existing circumstance. If there are any material changes to this picture, it can mean the difference between having a loan approved, and having it declined.

Certain things are verified and then re-verified at different points in the process, and here is a list of common bugaboo’s that uninformed mortgage borrowers can sometimes find themselves in.

Do not stop paying your current mortgage: Your credit can be re-examined prior to funding, and a late payment can disqualify a borrower from getting funded.
Do not pay down or pay off any debts: Let us advise you if it is necessary to pay down or pay off debts in order to qualify. Sometimes paying off old collections can drastically lower your credit score, or impact your borrowing profile in counter-intuitive ways.
Avoid multiple credit inquiries: Multiple credit inquiries will have to be explained by the borrower in writing, and can sometimes negatively affect your credit rating. Watch out for certain purchases such as mobile phone plans or gym memberships, as these can sometimes result in an unintended inquiries. With regard to shopping for your mortgage and talking to different lenders, you can actually have unlimited credit inquiries during any two-week period and this will NOT have any adverse affect.
Do not incur new debt: Buying a new car or making other expensive purchases during the loan process can change your credit worthiness. New debts will directly impact that critical “debt to income ratio”, which governs how much money can be borrowed. Wait until after funding, there, tiger!
Do not change jobs or quit your job: Your approval is based not only on income, but also on employment stability. Try to delay any of these types of changes until post loan funding.
Do not change banks: Do not switch to a new bank during the loan process. This will create a ton of additional paperwork and special verification for you.
Do not remodel your home: In a refinance, one of the parts of your “approval snapshot” is the real estate being used to secure the funding. If the property is in any state of dis-repair, that is a likely deal breaker for the loan approval.

Lots of these things are un-avoidable, but if you know what to watch out for, it can make your life and your loan process easier to deal with. Problems with a mortgage approval are practically inevitable, but my job at Portland Home Loan is to minimize these problems for you at every turn.

A Special Message to My Friends and Clients

James — Mon, 30 Aug 2010 19:43:31 +0000

This is my plea to all of my clients past and present: Even if we closed a mortgage earlier this year, even if you think you are upside down on your homes equity, even if you think for some reason that this recent outbreak of mortgage refinance activity will not apply to you… you have to give me a ring, or send an email to james@pdxhomeloan.com. Many of you are invested in 401(k) plans, and mutual funds, and have been taking a beating from the plunge of the stock market since 2008. Well… think of the ridiculously low mortgage rates that are currently available as a way to BENEFIT from that same down market. (Because as stock markets shrink, money goes to bonds, and when bond yields get lower, so do long term mortgage rates!)

This Portland Home Loan website has been designed to make it as quick and easy as possible to engage with the process. There are two big buttons in the upper right corner of the site — one is a Loan Application, and the other is a Rate Quote and super quick questionnaire. Please fill out one of these forms and let me at least do some quick cost/benefit analysis for you. I have many clients saving over $500 per month with absolutely no fees from the lender or title company. Many more clients are switching to 15 year amortizations and saving hundreds of thousands of dollars in total interest cost.

Please take a minute and put me to work for you. I have never seen anything like this, and although it appears that we will be living with low rates like this for some time to come, nobody can be certain that this will last.

I am doing my best to pick up the phone and reach out individually to you, but please know that I am open for business and we are closing most loans in about 30 days.

Mortgage Rates Below 4%?

James — Mon, 23 Aug 2010 19:56:49 +0000

Until recently the holy grail of 30-year fixed-rate mortgages has been the 4.5% rate. I saw that price appear for 90-minute windows a handful of times in 2009, but it was like a unicorn sighting… brief and magical, and ultimately only spoken about in the hushed tones of mortgage legend.

We have recently taken a ride into this pricing territory and we appear to have set up camp here for the foreseeable future. In fact, I have been locking rates on 30-year fixed mortgages well below 4.5% in recent weeks — 4.125%, 4.25%, and 4.375% have all been locked for my clients in varying circumstances.

In these steadily declining mortgage rate environments, the no-cost refinance can start to make a lot of sense for another reason — no cost “recapture period” makes another refinance a possibility, but I digress.

We are squarely in a new trading range on the FNMA 4.0% mortgage bond coupon, and this tells me that we will be in this mid 4% fixed rate range for possibly the rest of the year, but certainly for the next 4-6 weeks. I woke up a couple of Mondays ago, and the idea of a 30-year fixed-rate mortgage below 4% suddenly seemed not only plausible, but maybe even probable. We have been steadily “stair-stepping” up into this range since April 2010, which was the highest rate period of the last 6 months. So we gain, gain, gain… with one day where we take a tumble, only to recover the loss plus more in the following trading days. This has been the pattern all summer long with no break.

One of the most valuable parts of the service that I provide is market intelligence regarding WHEN to lock. I subscribe to a service that gives me real-time market data surrounding the mortgage bond market, and I am always aware of news reports and market reports that will influence our rates one way or another. The combination of my ability to shop your file to a variety of funding sources through both correspondent and wholesale funding channels, along with this market timing data will always afford my clients the very best available mortgage rates and fees.

So the sub 4% thirty-year fixed-rate may be the new elusive unicorn, but we are already there on sub 4% 15-year fixed. I have seen 15-year fixed-rate loans at 3.75%, recently. I usually hate to make rates the main story surrounding any mortgage, as the rate is only one variable in the value of a loan, but these rates are truly worthy of note. Visit Portland Home Loan for more information.

If your rate is above 4.5%

James — Tue, 20 Jul 2010 18:38:15 +0000

I’ve been hearing the radio ads just like everyone else, and our favorite breathless loan cheerleader has lately been urging you to call him “if your rate is higher than 4.5%”. I’m sure he would love to refinance you over and over again without any regard to if it makes sense for you.

Lets say you currently have a mortgage for $180k at 5.5% interest. Your principal and interest payment is $1,078. And now you really think that you are being foolishly ripped off for paying more than 4.5% on this loan. Lets also say that your credit score is 685. So now, in order to achieve this magical interest rate, you will need to pay a load of mortgage processing fees, an appraisal fee, title fees, plus 2% in points to cover the premium associated with a 685 credit score. Lender and title fees totaling $7,000. This is what you will pay in order to achieve a monthly savings of $115. The easy math is to divide the monthly savings into the upfront costs and calculate how many months it will take to pay for itself: $7.000 / 115 = 60 months or 5 years to break even. There are also some additional tax implications to refinancing, for instance, when you reduce your interest rate you reduce your tax deduct-ability.

Or, if the loan that is being paid off was a refinance mortgage, or a purchase mortgage there are some different things that come into play (Paying off a previous refinance mortgage can create a “recapture” of a prior claim), I think upon further analysis that the actual recapture would be longer than 60 months.

But if this borrower was convinced that they would be in the property for at least that period of time, and/or had a PLAN for using that added cash flow to further benefit them beyond just spending it. A case could be made for doing this refinance. Thankfully there is a new standard form that gets included with refinance mortgages called a “net tangible benefit” sheet. It forces loan originators to prove that the borrower is benefiting from the new mortgage.

If you would like to dig into YOUR personal finance situation more deeply to determine if a refinance would be worthwhile, I would love to make some time to figure it out with you.