Oregon Mortgage Blog » Refinancing

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.

New HARP loan “HARP 2″ + new FHA loan limits 2011

James — Tue, 22 Nov 2011 05:16:29 +0000

Christmas might be coming early for homeowners in Oregon and Washington! The Obama administration has been putting pressure on banks to come up with ways to extend opportunities to refinance into lower rates in recent months, and it appears that we’re getting some movement on this finally. The original HARP loan (aka: Home Affordable Refinance Program) has been around since early 2009, and allows homeowners to refinance their existing first mortgages into lower rates, EVEN if the value of the securing property has gone down dramatically. The program allows you to borrow 125% of the appraised value of the home, but most major lenders only really allow for 105%. A great program all around, however – all Obama can do is have FNMA create the guidelines, but lenders still have to deliver the program based on those guidelines (FNMA is NOT a lender, but buys loans from banks). Many have been disappointed with the final numbers, the government thought that millions of families would benefit from this program, but since its come out, only eight hundred thousand or so of these HARP loans have been written. Given the current economic environment, Obama wants to remove as many barriers as possible for homeowners to access the savings and stability these low rate mortgages provide…. enter “HARP 2″.

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!!

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.

———————–

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.

What To Do If You Are Underwater On Your House

James — Thu, 16 Jun 2011 06:02:19 +0000

Many of us are finding ourselves living in homes worth less than we paid to purchase them (myself included). Some of us purchased with a down payment, to find that equity we started with evaporating at what seems to be an alarming and relentless clip. Some of us purchased with little or no money down and feel stuck in a home that cannot be sold for what is owed on it. These are troubling times for the recent home owner – and many of us need more than a mortgage 101. But I’m here with a message of hope. I recently met with a young woman who purchased a home with zero down in 2007 for $225,000.00 and bought with a fixed rate INTEREST ONLY product (meaning: she still owes $225 against it). She wanted to see what a refinance would look like for her. I told her to brace herself for what the appraisal would show us. I suggested that we look at an FHA refinance which is the loan that allows for the least amount of equity (FHA will allow 97.75% of the appraised value on a rate/term refinance in Portland) and hope for a strong appraised value. Well, we got the appraisal and the value came in at $177,500. What this meant to her was that if she wanted to proceed with this refinance loan she would have to bring over fifty thousand American dollars to the closing table to make it go. Crazy, right? Of course that is a deal killer, right? Wrong, we’re going ahead with this loan and we’re happy to do it because it makes great sense for this particular borrower and here’s why:

1. The loan she is currently in is particularly horrible. Its a fixed rate, no mortgage insurance loan at a rate of 8.5%. We are able to get her a new FHA insured loan at 4.25% (at the time of blogging this).

2. She intends to keep this house for a long time. Even if she wants to move in the future, her plan is to retain this home as a rental.

3. She has access to the cash to make the loan work.

4. The annual return on this cash ($55,000 to be exact) AFTER TAX is $3,540. She will spend $3540 less per year to own this home.

This return on cash is about 6.3% AFTER TAX — meaning adjusted for the lowered tax benefit of the lower interest rate. Also, if she were to invest this $55k, any gains would be taxable so she’d have to make about 15-20% more return to net this same amount. This is a good return on your money if you ask me, and the best part is that its guaranteed. Additionally, if we can average a 1.5% property appreciation over the next 10 years, she will be made whole again on the $55k she initially parted with (unfortunately this part is NOT guaranteed… although quite likely I think).

When you put these factors together along with the experience of feeling the IMMEDIATE benefit of the new and improved loan. You can see why we think moving forward is the right move.

If you would like me to do some analysis on YOUR particular situation, I would be happy to create a custom report that shows what these low rates can really mean for you. Generally, if you have the cash, AND the intention to stay in the home for a while, re-structuring your current financing could be a no-brainer.

Call or email anytime! I am licensed to lend in both Oregon and Washington.

FHA Streamline: How to Qualify

James — Sat, 04 Jun 2011 20:56:00 +0000

I should have subtitled this post: “Why you might NOT Qualify”

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.

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.

Free Resources for Divorcing Couples in Portland, Oregon

James — Sun, 24 Apr 2011 22:35:56 +0000

If someone you know is contemplating a divorce, do them a favor and send them a link to this blog post. Helping families in a divorce is one of my core services as a mortgage professional. I can help families get their finances and debts clarified and organized, as well as help them make clear decisions about what their options are with any real estate holdings. Not only have I been specially trained in analyzing real estate, liabilities and credit and how they apply to a divorcing family, but I also offer a FREE online resource for divorcing couples in Portland called “Divorce Shield”.

The divorce shield service is a completely free, anonymous website where you can download a customized plan for yourself that will highlight the specific decisions you will have to make.

Visit my site to DOWNLOAD YOUR DIVORCE SHIELD PLAN today.

I couldn’t be more proud to offer this informational resource about divorce to my clients and blog readers. There has never before been a single place to find a WEALTH of best practice information as well as access to a variety of local professionals who are also specially trained in 12 key aspects of the divorce process. Logging into this site is completely anonymous, and users will never be contacted by me or any other professionals that sponsor these reports.

These reports have information about:

Modes of divorce:

“kitchen table divorce”
“mediation”
“collaborative divorce”
“litigated divorce”

You will find worksheets on what to expect with the cost of divorce, including:

Budgeting worksheet
Saving worksheet

You will find access to financial professionals that can advise on:

Asset planning
Insurance concerns
Real estate buying/selling

You will find access to mediators, collaborative divorce professionals, divorce attorneys, and family counselors, as well.

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).

The Difference Between New & Old FHA Rules

James — Mon, 27 Sep 2010 22:25:24 +0000

Just recently for Portland Home Loan, I prepared an analysis for 4 purchase scenarios on the same property. It is a purchase of $300,000 here in Portland, OR, and the 4 options are:

- 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:

The monthly premium (which is discounted based on a large upfront lump sum), and
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!