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Real Estate Outlook: Mortgage Rates and Inflation

Most of the key economic indicators for real estate continue to be at least moderately positive – home sales are up, prices are stabilizing or up, unsold inventories are down, and even new unemployment filings are down slightly.

But there’s a storm cloud looming on the near horizon that everybody needs to keep an eye on: Mortgage rates have been moving up – fast. Bond market investors are spooked by the Federal government’s massive borrowings to pay for the stimulus and the deficit.

They’re worried that serious inflation may be coming and they’re demanding higher rates on the ten year Treasury bonds that are the benchmark used to price mortgages.

But let’s focus first on the positive side of the ledger: A key housing price index released last week suggests that the long-awaited turnaround may be underway. The Integrated Asset Services Index – which based on data from 15,000 local market segments around the U.S. – went flat on a national basis in May for the first time in a year.

Prices in the Northeast were up by six tenths of a percent for the month. In the Midwest they rose by one tenth of a percent, they were down slightly in the South, and flat in the Western region.
Now that might not impress you, but David McCarthy, CEO of the research and services firm, said flat means bottoming out – and in his words, “that’s encouraging (for housing) for the long term.”
In some California markets that had experienced severe hits during the darkest days of the bust, the price changes for the month were larger than the national numbers.

San Bernadino prices gained 1.1 percent between April and May. Monterey saw 3.7 percent increase and Sacramento homes were up four tenths of a percent.

Meanwhile, ZIP Realty’s monthly national survey of unsold housing inventories found the number of MLS listings in 28 major markets down by 4 percent in May, and by 24 percent from year-earlier levels.

Now on to the sobering news on mortgage rates: No one can predict precisely how high rates are headed, but in the past two weeks they’ve jumped by more than a percentage point. The Mortgage Bankers Association reports that last week along average 30-year fixed rate jumped to 5.6 percent from five and a quarter the week before.

Some analysts project rates to hit and surpass the 6 percent mark if current trends continue.

Bottom line: Given that house prices have turned around, and interest costs are soaring, value-conscious shoppers need to get their contracts and loan applications in – quick!

Source: Realty Times, Kenneth R. Harney

A Tale of Two Markets Divided By the Conforming-Loan Limit

Reporting from Washington – Roused by a combination of low mortgage rates, sagging prices and government largesse, first-time buyers appear to have entered the housing market with vengeance. According to the latest statistics from the National Assn. of Realtors, half of existing-home sales were to rookies who had never owned homes before.

But at the top of the housing ladder, the move-up market remains at a virtual standstill, stymied by the inability of sellers to attract buyers who can obtain financing at rates close to what first-timers are paying.

Even if the sellers manage to hook a buyer who qualifies for a mortgage under today’s super-strict underwriting guidelines, the sellers are probably going to have to invest much of their profit in their next home if they hope to move on.

What we have is a tale of two markets where the dividing line is $417,000, the so-called conforming-loan limit. It’s the ceiling on the loans that can be bought by Fannie Mae and Freddie Mac, the two government-sponsored enterprises that buy loans from primary lenders and package them into securities for sale to investors.

Below that amount, Fannie and Freddie provide the grease that keeps money flowing into housing. But above the ceiling, known as the jumbo-loam market, there is no government underpinning in most places.
“If you ever wondered what the mortgage market would look like without government support, that’s what we have today in the jumbo market,” says Howard Glaser, a Washington D.C., financial services industry analyst. “And it’s not just the high end of the market that’s impacted. It affects the market all the way down the ladder, and I’m not sure policymakers in Washington understand that.”
Eighteen months ago, housing at all levels had a predictable supply of mortgage money. But when Fannie’s and Freddie’s accounting problems got the better of them, and most of Wall Street’s investment bankers were unable to pay their bills, private investors pulled out of the mortgage market practically overnight.

The U.S. government came to the rescue by placing Fannie and Freddie under the government’s wings until the two companies could right themselves and by bailing out the titans of Wall Street. Lawmakers also acted to goose the upper-price brackets by temporarily raising the Fannie-Freddie loan limit to$729,750 in 76 of the nation’s 3,300 counties. (The ceiling in high-cost markets is scheduled to fall back to $625,000 on Jan. 1 unless Congress extends it.)

The limit is somewhere between $417,000 and $729,750 in 600 other places. But investors are still so gun shy that the great majority of Fannie’s and Freddie’s mortgage-backed securities are now being bought by our own central bank, the Federal Reserve. Worse, in the jumbo sector, there is hardly any securitization at all, and lenders are increasingly reluctant to make jumbo loans they can’t sell, at least at rates that borrowers consider acceptable.

“The jumbo market is not functioning,” says Lawrence Yun, chief economist at the Realtors group. “We hear from our members every day, ‘Fix the jumbo market, fix the jumbo market.’”
Yun says lenders are increasingly reluctant to make jumbo loans even though historically the risk of default is less. The economist also notes the difference between conforming and jumbo laons has jumped from 1.4 percentage point in 2005 to 3.9 points in March.

“Even when people have the capacity to buy, they’re not, because they don’t want to pay the jumbo rate,” Yun says.

This isn’t about people who are trying to buy and sell homes costing $500,000 or more. It’s about the entire housing market, because when current owners can’t sell their houses and move up to the next rung on the ownership ladder, those below cannot move up to the next level, either, so the market becomes clogged.

So for the most part, those who don’t have a home to sell before they can buy a new one are fueling current sales. In March, according to the Realtors group, 53% of buyers were first-timers. But that figure can be misinterpreted.

“It doesn’t mean first-time buyers are rushing to buy,” says David Lereah, the Realtor group’s former chief economist. “It just means that there are so few trade-up sales that the first-time-buyer share is automatically going to go up.

According to the real estate agents, the national share of sales above $750,000 this year is only about half what is was just two years earlier, dropping from 4.4% in 2007 to 2.3% currently. As a result, the inventory of houses for sale at or above the price point has more than doubled, from almost a 19 months’ supply to what Yun calls “a very, very unhealthy” 41 months’ supply.

A price-distribution study by the National Assn. of Home Builders shows that although the sale of houses under $250,000 rose significantly last year over 2005, the height of the housing boom, sales of houses costing more than that are down – from 32.7% in 2005 to 28% in 2008 in the $250,000 to $500,000 bracket, and from 12.4% to 7.9% in the $500,000 to $1 million range.

There are two markets operating right now, says Gopal Ahluwalia, the builders group’s chief research economist. “In one, mortgage rates are low and prices are down,” he says. “But in the other, rates are high and people can’t sell at any price.”

According to the National Assn. of Realtors, loans above $417,000 account for 10% or more of the market in 11 states and the District of Columbia. In Hawaii, 43% of loans are above $417,000. In California, the jumbo share is 41%. In D.C., it’s 30%, and in New York, it’s 22%. In 14 states, moreover, 11% or more of the houses are valued at $500,000 or above. And it’s not just the usual places like California and New York. The list includes Delaware, Oregon and Illinois.

The jumbo sector is “more widespread than people are aware,” Yun says. It’s not just a few coastal markets.”

Source: Los Angeles Time, Lew Sichelman

New Rules Come at a Cost for Appraisals

The Federal Housing Finance Agency (FHFA), Fannie Mae, Freddie Mac, and the New York State General Attorney have created a new agreement titled the Home Valuation Code of Conduct (HVCC), which prohibits lenders, mortgage brokers, and real estate agents from selecting and having any “substantive communication with appraisers.

Let's make sense of what this means for consumers.

HVCC was created to protect consumers against fraudulent appraisals, which some industry experts believe was a contributing factor to inflated home values.

The code applies to all conventional, single-family loans that are originated on or after May 1 and are sold to Fannie Mar or Freddie Mac. It does not apply to loans backed by the Federal Housing Administration (FHA) or Veterans Administration.

Under HVCC, a lender’s loan production staff is prohibited from selecting an appraiser for property or having any “substantive” communication with an appraiser or an appraisal management company about a home’s valuation. However, a non-loan production staff member may call the appraiser, or the lender can farm out the request to an appraisal management company.

Lenders on longer can perform “value checks,” where appraisers pull comps for a house to see if the numbers are likely to work for a client, before the actual appraisal is ordered.

Mortgage brokers and/or real estate agents cannot order or pay for an appraisal.

Borrowers will receive, free of charge, a copy of their appraisal at least three days before closing, giving homeowners more time to contest what they view as an inaccurate appraisal.

Because lenders are more likely to farm out requests to appraisal management companies, some appraisers believe borrowers will have to pay more out-of pocket- expenses – approximately $100 more than they would have previously.

The appraisal process may take longer, so some housing experts recommend borrowers lock in a mortgage rate for a longer period of time. It’s important to note that the longer the lock, the more costly it is.

Some real estate industry analysts are worried that appraisal management companies may hire an appraiser unfamiliar with a neighborhood, which could lead to an inaccurate valuation. To prevent this, appraisers recommend consumers check an appraiser’s name and license number with the California Dept. of Insurance to see where the appraiser is from and if the appraiser is familiar with the area where the home is located. Consumers and/or mortgage brokers and agents can visit www.insurance.ca.gov/0200-industry/0070-check-license-status/ to check an appraiser’s license.

Source: Chicago Tribune

U.S. Regulator: Be Wary of Reverse Mortgages

Some industry analysts, including U.S. bank regulator, John Dugan, believe that reverse mortgages could be the next subprime mortgage product to gain traction. Dugan says that while reverse mortgages can be beneficial, they also share some of the characteristics of the riskiest types of subprime mortgages.

Although the majority of reverse mortgages is insured by the Federal Housing Administration and poses limited credit risk, a different class of reverse mortgages is becoming popular—“proprietary” products—which offer less consumer protection.

To protect consumers, regulators are crafting guidelines and Dugan is recommending that regulators be more vigilant about misleading marketing and cracking down on lenders who try to bundle a reverse mortgage with other financial products, such as an annuity or life insurance product.

This week’s C.A.R. Mortgage Update contains information about reverse mortgages, mortgage rates, mortgage re-fis, loan modifications, an increase in the number of prime mortgage defaults, the FDIC’s plan to postpone the initial sale of bank assets, and a new loan for seniors.

Source: C.A.R.

Business Roundtable Releases Recommendations to Reinvigorate U.S. Housing Market

The Chairman of the Business Roundtable's Housing Working Group, Richard Smith, released this news recently of efforts to push Congress to spur the housing market:

I am writing to let you know of a positive development for the real estate industry that was announced earlier today by the Business Roundtable, an association of chief executive officers of leading U.S. corporations. Specifically, the Business Roundtable’s Housing Working Group – of which I am the chair – issued a set of recommendations for the White House and Congress that are aimed at jumpstarting the housing market in order to stimulate a broader economic recovery.

The Business Roundtable’s recommendations are as follows:
· Keep mortgage interest rates at historically low levels (below 5 percent) for at least one year;
· Expand the current First-Time Homebuyer Tax Credit incentive from the lesser of 10 percent of the purchase price of the home or $8,000 to a higher limit of either 10 percent or $15,000 for all homebuyers, remove the income restrictions and include all primary residence purchases for one full year;
· Conduct a thorough review of current foreclosure mitigation and loan-modification programs in light of rising loan-modification re-default rates;
· Make permanent the current temporary confirming loan limits; and
· Continue to review and strengthen government efforts already underway to review and refine mortgage lending practices

We believe targeted, demand-side solutions – such as the ones Business Roundtable is recommending today – will provide a critical next step for a housing recovery that will help create jobs and boost the economy as a whole.

Please understand that the legislative process is often a long and winding road that is hard to predict, but at some point in the future, we expect to call on you to make your voices heard in support of any new legislation in Congress that would advance these recommendations. We will communicate with you as these legislative opportunities occur – but for now, just know that we appreciate your support.

Source: AtHome.Realogy.com

Conservative Approach to Home Pricing Makes It Harder to Refinance or Sell

Appraisals are becoming one of the biggest obstacles for Americans trying to sell their homes, refinance their mortgages or tap into home-equity credit lines.

During the housing boom, appraisers often complained of pressure from lenders to inflate home-value estimates to justify dubious mortgage lending. Now, some people in the mortgage business -- and some borrowers – say the pendulum has swung too far the other way.

Patti Sanders, an aerospace engineer in Oakdale CA, knew prices were down sharply but said she was “flabbergasted” recently when her 3,100-square-foot Victorian home was appraised at $250,000, compared with $635,000 assayed two years earlier. The new estimate prompted a lender to reject her application for a refinancing that would have lowered her mortgage payments about $400 a month.

Lenders burned by huge losses from defaults now are pressing appraisers to be more conservative. And appraising itself is more difficult with home prices fluctuating rapidly and transactions few and far between in some markets; sales prices from a few months back may no longer reliably indicate the value of nearby homes.

“If history is no longer valid, then it is very difficult to get good and accurate values,” said Mark Rattermann, an appraisal trainer in Indianapolis.

John Rooney, an appraiser in Phoenix, said about half the recent appraisals he has done for people seeking to refinance have been too low to allow it. Applying to other lenders is likely to cost borrowers $350 or more for another appraisal.

Valuation disputes are also throwing a monkey wrench into some sales. Chris Rubis, a real-estate agent in Fairfield County, Conn,. said one client recently accepted an offer of about $750,000 on a four-bedroom, four-bathroom home. But the appraisal, which was done by someone outside the local area, came in last week at $700,000. That might require the buyer to come up with more cash for a down payment.

“It’s opened a whole new door for negotiation,” Mr. Rubis said.

Credit lines are also vulnerable. J.P. Morgan Chase & Co. recently froze one customer’s home equity line of credit because, the bank said, his Manhattan apartment – a 2,650-square-foot three-bedroom, two-bedroom duplex with a terrace appraised at $1.475 million in 2005 – was worth just $600,000. Chase told the borrower, who asked not to be identified, that the lower credit line would remain in effect until a new appraisal could demonstrate the value was much higher than $600,000.

The borrower then paid for a new appraisal that pegged the property at $1.8 million.

“To protect borrowers and the bank, we use automated appraisal system on our portfolio,” a Chase spokesman said. “The system has proven effective. However, we encourage customers who think that the valuation is too low to order an appraisal and we will reimburse them…if it supports their claim.” Chase will restore this borrowers full credit line, he added.

In some cases, lenders are requiring that appraisals be based on sales closed within the past three months rather than the prior six-month norm, appraisers said. Some lenders are also asking for comparisons with at least one sale in the past 30 days.

Taking their cues from lenders, appraisers are avoiding any estimate that could be deemed excessive. “I don’t want to stick my neck out,” said Mr. Rooney, the Phoenix appraiser.

The situation became more complicated on May 1, when the appraisal industry adopted the Home Valuation Code of Conduct. These new rules apply to mortgages that will be owned or guaranteed by government-backed mortgage companies Fannie Mae and Freddie Mac, which recently have accounted for about two-thirds of all new home loans.

Fannie and Freddie agreed to the code last year after New York Attorney General Andrew Cuomo accused them of failing to ensure that appraisers were shielded from pressure to inflate their estimates.

The code bars loan officers, mortgage brokers or real-estate agents from any role in selecting appraisers. This has encouraged lenders to outsource the selection to appraisal-management companies, or AMC’s, which take a sizable cut of the appraisal fee. As a result, appraisers are under pressure to “do it faster, do it cheaper,” said Bill Garber, a spokesman for the Appraisal Institute, a trade group.

Debbie Huber, a Las Vegas appraiser for 20 years, said she has turned down requests from AMCs that offer to pay 50% to 70% of her standard fee and require that the work be completed in as little as 48 hours.

Some appraisers said AMCs settle for appraisers who have little experience or live far from the homes they evaluate. John Simms of Peoria, Ariz., said he often gets assignments more than 100 miles away in neighborhoods he doesn’t know well.

The upshot, appraisers said, is less accuracy and certainly about a property’s actual value.

The code also permits lenders to own stakes in AMCs. That means lenders can profit from a service they require borrowers to buy – and that protects the lenders themselves.

Appraisal-management companies said they need a big cut of fees to cover their costs and ensure quality. Jeff Schurman, executive director of the Title/Appraisal Vendor Management Association, said AMCs typically take about 40% of the fees and appraisers get the rest. Mr. Schurman said he has seen no evidence that AMC’c practices lead to lower quality.

While the new code is likely to prevent some abuses, it also removes flexibility. For instance, loan officers or mortgage brokers used to be allowed to discuss specific home values with appraisers, who sometimes would advise against ordering an appraisal if it seemed unlikely to be high enough to warrant a loan. That would save borrowers money.

The new regime also results in higher costs in at least some cases. Mitch Ohlbaum, a Los Angeles mortgage broker, said on client was recently charged $500 for an appraisal that would have cost about $300 before the code took effect.

Another source of frustration: If a borrower is happy with an appraisal ordered by one lender but decides to seek better loan terms from another, a new appraisal will likely be needed. The Mortgage Bankers Association said it is looking at ways to make appraisals more “portable” from one lender to another.

Source: James R Hagerty and Ruth Simon, Wall Street Journal

Low Mortgage Rates Are Going, Going...

If you’re looking for a new 30-year mortgage, last week’s events from the financial markets carry a very simple message: Get ‘em cheap while you still can.

Rates on conforming 30-year loans jumped dramatically in just a few days, ending the week at an average of 5.27% according to Bankrate.com. That’s still OK by historic standards, but it’s a jump from the levels seen just a few weeks ago, when you could get loans at 4.75% or below.
The underlying cause isn’t hard to find. Rising government debts, and burgeoning hopes of an economic recovery, are pushing up long-term interest rates on government debt. The yield on the 10-year Treasury, which was barely 2% near the end of last year, surged to 3.67% late last week before settling back slightly. And that, in turn, pushes up rates on other long-term loans.

What does this mean for you?

This surge in mortgage rates, if it continues, is ominous news all around. It’s bad for those trying to refinance an existing mortgage, those looking to buy a new home, and those looking to sell their home. It may also be bad for the stock market, and maybe even for the dollar, too. More on that later.

For those trying to refinance: If you hadn’t locked in the rate already, you are probably out of luck. You may be stuck with higher rates.

Ironically, if you were stuck crawling through the refi process when the rates jumped, you may be a victim of new mortgage rules. These were introduced in the last year to prevent another subprime scandal. They have slowed down the loan approval process and have discouraged most lenders from offering rate locks until other steps have been completed. “Lenders are not locking in borrowers’ rates until the (home) appraisals are in,” says Paul Sapienza, broker at Drew Mortgage in Boston. Until last year, you could lock in a rate while you refinanced, or even looked for a new home. “That’s over,” Mr. Sapienza says.

For those looking to buy a new home: Be aware this rate hike – to 5.25%, from 4.75% recently – can add quite a bit to your expenses. It will cost an extra $50 a month for someone buying a typical $200,000 residence with an 80% loan.

Rates still look pretty reasonable, but now there’s an extra level of uncertainty in the process. Who knows where they will end up by the time you come to sign?

Some borrowers are now looking instead at adjustable rate mortgages, or ARMs. In some cases the initial rates are lower. Alas, we’ve seen this movie before. ARMs are high risk, and in most cases a terrible idea. They mean the lenders are transferring inflation and interest rate risk to you. In this environment both risks are substantial.

Source: The Wall Street Journal, Brett Arends

Get Your $8,000 Tax Credit Now!

Qualified, first-time home buyers using a Federal Housing Administration (FHA)-insured mortgage now can apply the $8,000 federal tax credit toward their down payments, the U.S. Dept. of Housing and Urban Development (HUD) recently announced.

Currently, borrowers applying for an FHA-insured mortgage are required to issue minimum down payments of 3.5 percent. Buyers still must issue the mandatory 3.5 percent down payment, but the tax credit now can be used as an additional down payment, or for other closing costs, which can help lower principal balances and monthly payments.