Fannie Mae Giveth and Fannie Mae Taketh Away…

The beginning of June brings big news, both good and bad, from Fannie Mae, the government sponsored enterprise that is just about the only source of mortgage money in the secondary markets today (along with Freddie Mac which maintains very similar guidelines).

Let’s start with the GOOD:
As of today Fannie Mae has done away with the 5% declining market loan to value reduction. The declining market deduction effectively eliminated 100% financing in markets suffering from price declines and reduced maximum loan to value ratios across the board. Many homeowners found themselves unable to get financing due to the triple whammy of lower home values, tighter lender guidelines and the additional 5% declining market factor.

We can debate the soundness of this decision but it is definitely a positive for anyone looking to finance a home in a declining market. In effect, the 5% reduction was accounting for the likelihood of lower values tomorrow and making sure that lenders were making sound decisions regarding the collateral for their loans. The downside was that the reduction made money harder to get for both purchases and refinances and put further downward pressure on home values. An ugly Catch 22 with no easy solution but Fannie has decided to err on the side of homeowners and eliminate the declining market deduction.

You’re probably expecting bad news now that we are done with the good, but this news item contains some rays of sunshine mixed in with a heavy dose of clouds. As of June 1, Fannie Mae has implemented Desktop Underwriter 7.0, the newest version of its automated underwriting software (AUS). With version 7.0 the algorithms that determine whether or not your mortgage will be approved or not, and at what terms, has undergone significant revisions.

First, the good:

• Self-employment will no longer be considered a risk factor.
• Purchases will be considered a lower risk.

And, the not so good.

• Refinances with cash-out are now considered much a significant risk
• Interest only home loans are now considered a significant risk
• Maximum qualifying ratios have been reduced meaning more verifiable income will be required.
• Condos are now considered a significant risk factor
• Mortgage insurance is no longer considered a risk mitigating factor
• Authorized User accounts will be excluded in DU’s credit risk assessment meaning you won’t be given credit for being an authorized user on someone else’s accounts in good standing.
• 580 is the minimum credit score for all loans
• Borrowers with a mortgage delinquency of 60 days or more in the last 12 months will be ineligible, even if the mortgage is current at the time of submission.
• ARMs with negative amortization and terms longer than 40 years will be Out of Scope.

The bottom line is that guidelines continue to tighten and borrowers need to be able to verify their incomes and maximize their credit scores.  Our “5 Steps to Mortgage Freedom” process will help you accomplish both.

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What the heck is LIBOR and what does it have to do with my adjustable rate mortgage?

LIBOR is the most common index for US adjustable rate mortgages. It is seen most often in hybrid ARM’s, loans with a fixed period that switch to a variable at the end of the fixed period.  While less common, it is seen in Option ARM mortgages as well, especially those originated in 2003 and 2004 when LIBOR fell as low as 1.00%.

When most people learn that LIBOR stands for London Interbank Offering Rate they want to know why in the world it would be used to determine the rate on their home loan in the US. I could go in to great detail as to why this is, but fortunately Business Week did the heavy lifting for me this week.

The Lowdown on LIBOR - BusinessWeek - 5.29.2008

In this quick article, BW explains:

• What exactly is LIBOR?
• What does LIBOR have to do with me?
• What’s the recent controversy about? (If you didn’t know, European banks have been accused of manipulating LIBOR lower over the last several months. The article explains why and how it can affect you.)
• Do I need to worry if my loan is pegged to Libor?

Over the long run, hybrid adjustable rates can save mortgage borrowers a lot of money. The LIBOR is a mystery to most homeowners even when their mortgage rate depends on it. Take a few minutes to acquaint yourself with the index and feel free to comment or call if you have any questions.

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Are Conforming Jumbo’s Finally Ready For Prime Time?

Some important and potentially very valuable information to pass along today. Most of you are aware that earlier this year Fannie Mae and Freddie Mac increased their “conforming” loan limits as part of the government economic stimulus package. In some areas, including most of California, the loan limits increased all the way to $729,750. This was great news for many people with jumbo loans facing adjusting interest rates, needing cash out, or to consolidate other debt including 2nd mortgages.

Unfortunately, hopes were quickly dashed as lenders priced the new “conforming Jumbo’s” at nearly 1% above the actual conforming rates.

Today brings very good news as Fannie, Freddie and some of the major players in the mortgage markets got together over the last few days and drastically cut the rates on loans at the new limits. This means “conforming Jumbo” rates in the high 5%’s for a 30 year fixed and the very low 5%’s for a loan fixed for the first five years.

In addition, some lenders have eased the restrictions on consolidating a 1st and 2nd mortgage.

If you have a need to refinance a loan above the conforming limits, this may be your best opportunity. The increased loan limits are due to expire at the end of the year. Additionally, current rates are as good as they have been all year, matching the best levels seen since 2003-2004.

If you would like to see the current loan limit in your area, please click here. (Be sure to set “Limit Type” field to “Fannie/Freddie”)

For anyone interested in seeing a Total Cost Analysis comparing their current financing with options available today, shoot me an email or give me a call at 888-944-5674. I would be more than happy to discuss your options.

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Why Do They Need So Much Documentation????

During the booming years of the early 2000’s borrowers became more and more accustomed to providing less and less documentation for their mortgages. To some degree this made sense. Excellent borrowers with salaried income, significant assets and large equity positions really shouldn’t need to provide 2 years tax returns, 3 months of bank statements and 4 different forms of ID. Unfortunately, reduced documentation began to filter its way down to nearly every borrower. At the end of the boom, there were lenders offering stated income, stated asset loans to borrowers with credit scores below 600.

Now that the worm has turned, the pendulum has swung in the opposite direction. After nearly 2 years of losing money on mortgage portfolios lenders now want to see a lot of documentation from nearly every borrower. What you need to provide will vary according to your scenario but let’s look at what you should be prepared with when getting approved for a loan:

1. Paystubs covering the most recent month - with stated income loans going the way of the dodo your paystubs will provide the lender with a method for establishing your income and ability to make your new mortgage payment. In most instances, your most recent paystub will do but I would advise erring on the side of caution and providing stubs for the last month. Some lenders require it and it’s easier to just get all of your documentation together at once.

2. a. W2’s covering the most recent 2 years -Your W2’s allow the lender to see your income history and verify that you have a track record of earning a soldi income. Often 1 year will do, but some programs and lenders want 2 years so again, let’s just get them up front.

2. b. Tax returns covering the most recent 2 years - IF your income is derived from any of the following, the underwriter will want to see your tax returns for the last 2 years: rental income, commission income, self employment. These should be with your W2 so it shouldn’t be too much trouble. When a lender requests your “tax return” what exactly do they want? They want your Federal 1040 form. This includes all schedules such as the Schedule A, C and E as they provide important details depending on your situation. The lender does not need to see your state return as the Federal return contains all pertinent income data

3. Bank statements covering the most recent two months, all pages, even if they are blank - These may not be necessary in a refinance transaction where no money is needed to close but it’s never a bad idea to provide them. Human and automated underwriters always like to see that you have reserve funds in case you run into financial trouble.

3. Retirement and investment account statements covering the most recent 2 months or 1 quarter - See item #3. Even though you won’t be using these funds for closing, they always look good on your application.

4. A copy of valid US identification - With the Patriot Act lenders now need to verify your identity with valid identification such as a driver’s license or passport.

This may seem like a lot and you may ask yourself, “Do I really need to provide all of this?” The answers is sometimes no but in the current market you can save yourself and your mortgage planner a lot of headaches by providing a complete application package upfront. This will eliminate unhappy surprises later on and allow your mortgage planner to issue a complete credit approval knowing there are no unpleasant surprises or uncertainty hiding around the corner.

A complete package will also allow your mortgage planner to search the widest array of potential lenders. In today’s market every lender has set it’s own guidelines to protect against bad underwriting decisions. If we document your file with the bare minimum documentation it could prevent your loan from being submitted to another lender who offers better terms but requires more documentation.

The bottom line: It’s in everyone’s best interests to get a complete loan package put together as early in the process as possible. The small cost in time is more than made up for in headaches and roadblocks avoided. And it could even save you some money!

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New Conforming Limits Announced For CA

The Orange County Register is reporting that HUD has announced the median area home prices that will be used to calculate the new conforming loan limits.  Orange County will see a full increase to the max limit of $729,750.  LA County and most of the Bay Area will also be maxed to $729,750.  See the article for a full list of California Counties and the new limits.

If you have been waiting to take advantage of the new limits, especially if you have a adjustable rate mortgage that will face a reset in the near future, give me a call today and we can start putting your package together.  By the time, Fannie and Freddie are ready, we can have your loan ready for submission so you can be one of the first to take advantage of the increases.

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The Next Fed Conundrum

Money Magazine: Interest Rates - The New Conundrum

It’s been a very interesting few weeks waiting for HUD to publish the area median home prices.  Until the figures are published, conforming loan limits remain at $417,000.  While we are waiting the interest rate markets have not lacked for excitement.  After a very brief drop to the low 5% range in late January, rates surged into the mid 6%’s in less than a month.  At that level, there’s not much benefit in higher loan limits as jumbo rates in the high 6’s have been available throughout the credit crunch.

I have attached an article explaining why Fed cuts don’t directly impact mortgage rates and often actually lead to higher rates in the short term.  There is also a link to a Money magazine article discussing the Fed’s frustration with their inability to push long term borrowing rates lower.  You can read both in a couple of minutes and it will give you a great understanding of the rate markets.

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New Loan Limits Not All They’re Cracked Up to Be?

Jumbo Loan Rates Still In The Air - LA Times - 2.22.2008

I know this is a critical issue for many of you hoping to take advantage of the increased limits. Unfortunately not much is certain at this point but this article does a good job of documenting the uncertainty. HUD has at least 21 more days to publish the area median home prices that the new limits will be based on. Once they publish their number it will be about 1-3 weeks before Fannie and Freddie are ready to start purchasing the closed loans. As always, you’ll know what we know. In the meantime feel free to call or email with any questions you may have.

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Understanding the Conforming Loan Limit Increases

Understanding the Conforming Loan Limit Increases

We have seen a whirlwind of legislative activity these past few weeks! There is a lot of confusion surrounding the recently passed Economic Stimulus Package and the increase in conforming loan limits. Unfortunately, the new law can be difficult to decipher, and not everyone will benefit. For this reason, we have provided an outline below that clarifies what this new law means for you and how you can benefit from the increased loan limits.

Description and Overview:

An economic stimulus package just passed Congress on February 7, 2008 and was signed into law by the President on February 13, 2008. This new law is effective immediately and includes a temporary increase in both the FHA and conforming loan limits to as high as $729,750 in high cost areas. This means that the interest rates on many mortgages will go down because these loans are now eligible to be purchased by Fannie Mae and Freddie Mac or insured by the Federal Housing Administration (FHA). Previously, the FHA was only allowed to insure loans with balances lower than $200,160 - $362,790, depending on the county where the property was located. Also, Fannie Mae and Freddie Mac were only allowed to purchase loans with balances at or below $417,000. This resulted in limited options and higher financing costs for those with loan balances above these limits. The new law substantially increases these limits in high cost areas and opens up new options and lower financing costs for many people.

How to Determine “High Cost” Areas

There are two things you must know in order to determine if you are in a high cost area:

1. Understanding the Formula

If 125% of the local area median home price exceeds $417,000, the temporary loan limit would be that 125% of the median home price with a cap of $729,750. Here are three examples to illustrate this concept:

If the median home price in your area is $225,000, 125% of that number is $281,250. This is below the current $417k conforming loan limit. Therefore, the conforming loan limit in your area will not change. However, if $281,250 is greater than the FHA limit in your county, your FHA limit will go up to $281,250.

If the median home price in your area is $375,000, 125% of that number is$468,750. This is above the current $417k conforming loan limit. Therefore, the conforming loan limit in your area WILL change and go up to $468,750. This number is also higher than the highest FHA loan limits, so therefore your FHA loan limit will also go up to $468,750.

If the median home price in your area is $650,000, 125% of that number is $812,500. This number is greater than the maximum cap of $729,250. Therefore, the conforming loan limit in your area will increase to highest allowable amount under this new law which is $729,250.

2. Determining the Median Home Price in Your Area

The Secretary of Housing and Urban Development (HUD) will publish the median house prices within 30 days of the bill going into effect (30 days from February 13, 2008). HUD does not have any interim stats or information for us to use. However, the bill also states that HUD can use any commercially available data if they are unable to compile the information on their own within the 30 day timeframe. With that in mind, it is likely that HUD’s numbers will be relatively consistent with the data published by the National Association of Realtors (NAR), which already has a solid track record of tracking and publishing this information on a quarterly basis.

Therefore, until HUD actually publishes their version of the median home prices, the most accurate way to get this information today is to utilize the data that is published by NAR. Ironically, NAR just released their latest median home price update for the 4th quarter of 2007 on February 14, 2008! Contact me today and I’ll research your info and let you know exactly what the median home price is in your area and how you can benefit from this information.

What do all the dates mean?

There is some confusion because the bill has a provision that says the higher limits are only effective for loans originated between July 1, 2007 and December 31, 2008. In short, the reason it is effective beginning July 1, 2007, is because the credit crisis started to unfold in July and August of 2007. Mortgage market conditions rapidly deteriorated almost overnight. Many secondary market investors suddenly refused to purchase loans that couldn’t be sold to Fannie Mae and Freddie Mac. (For more info on how this process works, please see the article entitled Saga of the US Mortgage Industry.)

Unfortunately, many mortgage banks had already funded these loans in their own portfolio or through their warehouse lines of credit. Their intention was obviously to sell these loans on the secondary market after the loans were funded. However, the credit crisis prevented them from doing so, and they were stuck holding these loans in their portfolio. The July 1, 2007 date in the bill is designed to allow these lenders to unload these mortgages and sell them on the secondary market to Fannie Mae and Freddie Mac.

However, the July 1, 2007 date has no bearing whatsoever on new refinance transactions! In other words, it doesn’t matter when the loan you are refinancing was originated. The old loan could have been originated in 2005, 2006 or anytime before or after July 1, 2007 and it would have no effect whatsoever on your current purchase or refinance transaction. If you are refinancing a new loan today, whether it is a purchase or refinance transaction, that loan is subject to the new limits set forth in the bill.

The other date of December 31, 2008 means that the old limits will go back into effect after this year. In other words, now is the perfect time to buy a new home or refinance your mortgage because after this year, your costs will be higher and your options more limited again.

When does this all go into effect?

February 13, 2008 – immediately upon the President’s signature. Therefore, HUD is obligated to publish the median home prices within 30 days of that date. However, Fannie Mae, Freddie Mac, and various wholesale lenders may have different policies as to how these new loans are going to be priced and underwritten. That is why it is imperative that you work with a Certified Mortgage Planning Specialist who is committed, qualified and equipped to give you timely information and expert guidance every step of the way. Contact me today for a complimentary consultation. I can look up the median home price in your area and see whether you can save money in any way. Also, please pass along this update to anyone you know who may be able to benefit, and I’d also be happy to look up the median home price in their area and discuss with them whether they could save money.

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Stimulus Package Passes Senate: What Now?

With an 81 to 16 vote, the Senate passed an amended version of H.R. 5140, a $150 billion plan to jumpstart the economy with temporary tax breaks for consumers and businesses, extended benefits, and most importantly, two provisions designed to assist the housing market. According to CNN, the House is expected to consider and pass the amended bill as early as tonight, which could put the bill on the President’s desk as early as Friday. The bill temporarily increased the size of loans that may be purchased by Fannie Mae and Freddie Mac, raising the current level of $417,000 to reportedly up to $730,000 in the highest cost regions of the housing markets. The bill also increases the size of loans the Federal Housing Administration could insure. Rest assured, I am following this story closely and preparing the tools and resources you’ll need to make the most of this important legislation once it actually becomes law. By the way, if you have questions about how this new legislation affects you, your financing and your real estate holdings, give me a call or shoot me an email.  I’d love to discuss the specifics of your situation with you.

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Money Magazine Weighs In on The Debate Between Prepaying the Mortgage Vs. Investing

It’s difficult to pick up a financial publication or listen to a financial broadcast without someone bringing up the question of whether or not prepaying your mortgage is a good idea.  If you’ve listened to me for any period of time, you now that I am not a fan of early mortgage prepayment.  It reduces your ability to save elsewhere, increases your tax bill and leaves you illiquid in times of need. 

With that being said, I am the first to admit that nobody ever went broke paying off their mortgage.  If you lack discipline and are prone to spend every penny you can get your hands on, then mortgage prepayment can be an enforced savings “lock box.”  But most people that I know using this strategy are actually highly disciplined.  They budget and know exactly how much extra they can afford to put towards the mortgage each month. 

The problem with their thinking is that they are defining wealth as a lack of debt instead of looking at wealth as assets in excess of debts.  An example would be Bill Gates.  As the world’s richest man, he is far wealthier than you or I will ever be.  He also has more debt than both of us combined will accrue in a lifetime.  The wealthy, such as Mr. Gates understand opportunity cost and utilize the power of other people’s money whenever possible. 

Here’s what Money Magazine had to say:

Prepay your mortgage OR invest

The feel-good choice isn’t necessarily the smart choice.

When some extra cash comes your way, it’s tempting to put it toward your mortgage. You’ll save on interest and pay off your house earlier. Buying stocks, on the other hand, feels like a risky leap into the unknown, especially now.

Strictly by the numbers Paying off your mortgage or any loan is an investment, and your return is essentially the interest rate on the loan. If you have 25 years left on a 30-year mortgage with a fixed rate of 6.2 percent and you deduct your interest payments on your taxes, you’ll earn 4.5 percent by prepaying the loan (assuming you’re in the 28 percent tax bracket).

Now let’s say you invest your spare cash in stocks instead. You’ll pay a 15 percent tax rate on your long-term capital gains and dividends. So to beat the 4.5 percent return you’d get from prepaying your mortgage, you’d have to earn just 5.3 percent a year on your stocks before taxes.

The odds of your doing that over the 25-year remaining term of your mortgage are excellent: Historically, a portfolio of 80 percent stocks and 20 percent bonds has returned 7.5 percent a year after taxes.

• But wait Paying down the mortgage earns you a risk-free 4.5 percent. That’s as good as you’ll do with Treasury bonds. True, and if you are investing for a near-term goal and don’t want to take any risk, you can make a stronger case for prepaying your mortgage. But if you are investing for a goal that’s more than a decade away, you can and should take more risk for a chance at a higher return.

• You do the math To run the numbers on how much money you could end up with by investing, use the savings calculator at CNNMoney.com. To see how much interest you’d save by prepaying your mortgage, use the payoff calculator at Dinkytown.net.

• Beyond the math Of course, all that mortgage debt may be keeping you awake at night, especially if you are worried about losing your job or you’re approaching retirement and hope to live on less. You’d be grateful to be rid of that major monthly bill sooner. In that case, prepaying your mortgage starts looking better.

Remember, though, that by prepaying your mortgage, you are reducing your liquid assets. If you suddenly need money, it’s easier to sell a mutual fund than it is to pull cash from your home, and you can always pay off your mortgage later with the money you invest now.

• The bottom line Investing wins.

To read the entire article, which includes other topics like rent vs. buy and lease vs. buy (autos), click here.

If you would like to learn more about integrating your mortgage into your financial plan, shoot me an email with your contact information and I will send you a copy of NY Times best selling author and financial planner, Ric Edelman’s DVD on managing your mortgage (a $39.95 value) at no cost to you.

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