Getting a Home Loan May Get Tougher Soon.

If you have been thinking about buying a home but have been sitting on the fence lately and buying into the possibility that home prices may be falling soon, you better get off that fence fast!

The "Speak" on the street is that pressure is building that could make landing that precious home loan more difficult to get.

This past week the "FED" raised the discount rate another 25 basis points. This is in an effort to continue to keep inflation in check. However, the first rates adversely affected are those tied to Adjustable Rate Mortgages (ARMS) and shorter term financing such as credit card rates (the so called short end of the yield curve which are associated with short term treasury notes).

As rates are beginning to ratchet up on ARMS, the "FED" is planning to tighten underwriting rules on home loans. The ARM rates, that don't sit still, are seen as especially risky. Another popular loan type that the FED is scrutinizing are those that require little or no documentation about the borrowers' income, expenses or ability to repay the loan. These are known in the industry as "No Income/ No Assets" (NINA's)or Stated Income Stated Assets type loans where the lender does not verify either of these important components to qualifying. There are a number of other names given to loans with minimal income and or asset verifications.

For the last 6 years or so buyers have been able to deal with record-setting and skyrocketing home prices through the use of low interest rates along with the increasing numbers of easy qualifying loans which include Option ARMS, Interest Only Loans and the like along with 40 year terms to get the payment even lower.

ARMS come with initially lower rates, hence smaller payments that lend borrowers more leverage to buy more expensive homes or homes for which they may not have otherwise qualified. In the land of high home prices fixed-rate mortgages (FRMS) with their higher rates and higher mortgage payments are pricing a growing number of would-be home buyers out of the market.

ARMs, however, could begin to price home owners out of their home.

ARMs' cheaper initial rates are tied to home loan indexes, the interest rate starting point to which margins are added to set and move the actual ARM rate. The indexes are up and rising this year, nearing levels double what they were at some points last year.

The popular prime rate, for example, is now at 7.25 percent compared to just 5 percent a year ago and a static 4 percent for the last half of 2003 through the first half of 2004.

Federal monetary system experts are concerned too many home owners may soon be saddled with home loans they can't afford as their monthly payment rises beyond their financial reach.

In the third quarter, mortgage research firm Loan Performance said 33 of first mortgages approved by lenders were nontraditional loans, compared with 1 percent five years ago.

Within the next week or two, federal monetary officials plan to release a second set of guidelines aimed at lenders with portfolios heavy with the riskier loans. The feds want lenders to roll back the number of originations on riskier loans through tighter underwriting standards. That will make it more difficult for home buyers to land a loan, especially home buyers already on the border line of qualifying for a mortgage.

"Too many consumers have been attracted to products by the seductive prospect of low minimum payments that delay the day of reckoning, but often make ultimate repayment of growing principal far more difficult," said Comptroller of the Currency John C. Dugan in an early December speech to the Consumer Federation of America.

"At the same time, too many lenders have been attracted to the product by the prospect of booking immediate revenue without receiving cash in hand, a process that often masks underlying credit problems that could ultimately produce substantial losses," Dugan added.

Earlier this year, on May 16, coinciding with a heightened level of warnings about escalating home prices, industry fraud, the potential for higher interest rates and other concerns, the Federal Reserve, along with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision and the National Credit Union Administration, issued the joint "Credit Risk Management Guidance For Home Equity Lending".

The advisory said the quality of lenders' home equity portfolios was of concern, especially if "interest rates rise and home values decline. Sound underwriting practices and effective risk management systems are essential to mitigate this risk."

However, months later, rather than tighten requirements for home loan approvals, almost 40 percent of domestic banks reported that over the past two years they had increased the maximum size of primary mortgages they were willing to provide, while about 30 percent, indicated that over the same period they had increased the maximum size of second mortgages, according to the Federal Reserve Board's "October 2005 Senior Loan Officer Opinion Survey on Bank Lending Practices".

What's more, about one-fourth of those surveyed said that they had narrowed spreads of mortgage rates over an appropriate market base rate (which means there are more loans with attractive rates available) and that they had increased the maximum loan-to-value ratio on such loans (which means borrowers are allowed to carry even greater debt loads).

In his speech, Dugan dissected a payment option mortgage to reveal what could be a very rude awakening for some borrowers.

During the first five years of payment options, the loan allows the borrower to select from a menu of payment possibilities, low to high. If the borrower chooses the lower monthly payment he or she will pay little if any of the principal during the period. Meanwhile, the loan balance grows, amortizing negatively until the sixth year when payments are adjusted to ensure the principal is paid off over the remaining 25 years of the loan.

With a typical $360,000 payment option mortgage that begins with a 6 percent interest, monthly payments could increase by 50 percent in the sixth year if interest rates do not change. If rates jump two percentage points, to 8 percent, monthly payments could double.

"Is this an appropriate product to mass market to customers who may be looking at the less than fully amortizing minimum payment as the only way to afford a larger mortgage -- at least for the five years before the onset of payment shock?"

Dugan also asked, "And are lenders really prepared to deal with the consequences including litigation risk ­- of providing such products in markets where real estate prices soften or decline, or where interest rates substantially increase?"

Only time, and the fed's second advisory this year, will tell. We will have to wait and see.

Find Hidden Gold

New Loan Limits Create Refinance Opportunities for You!

Find some hidden gold this month! For example, just in time for the holidays, Fannie Mae and Freddie Mac announced a gift to the industry: the conforming loan limit for single-family homes in the continental United States will rise to $417,000 in 2006, an increase of almost 16 percent over the 2005 limit of $359,650.

When loan limits increase, some clients with whom I assisted with mortgage planning in the past may now qualify for loans at lower interest rates if their loan now falls within conforming rather than jumbo loan limits.

This adjustment could mean a significant reduction in your payment. On a 30-year, $417,000 loan at last year’s jumbo rate of 6.375%, a new conforming rate of 6% would mean a $101 difference in payments each month, or more than $1200 a year, without any change in interest rates.

How can you best take advantage of this information? Well, The Mortgage Pro gift-wraps it for you! With one phone call to my office (213-700-1968) the power of this savings can be analyzed for you.

What Causes Mortgage Rates To Change?

Did you know that one or more rate changes per day is normal?

Actually, it is unusual not to have at least one rate change in a day. Most people do not know that. Rate quotes can change when you call back later that same day. In the lending business, a rate change can also include a change in the point cost for the same rate. In other words, a rate can be no points in the morning, then later that day cost ¼ point. That is a rate change to lenders. Did you also know that mortgage rates are not directly affected by what Alan Greenspan does? Many times a fed rate cut can cause mortgage rates to go up. Mortgage rates change primarily based on: 1) the perception of inflation, 2) times of uncertainty and 3) the movement of money in and out of the stock market--that's it. When a piece of economic data shows weakness or uncertainty in the economy, rates tend to fall. The opposite is also true. A drop in the unemployment rate, a rise in durable goods orders, a rise in the consumer confidence index--rates go up. These influencing factors can present themselves at any time, many without warning, affecting mortgage rates instantly. There is no "delay". It doesn't take time to "filter down" like some people think. Reading the paper for quotes doesn't really work because the information is old by the time you read it. Radio, TV and billboards are not the answer because the details are always missing. They just want to get you on the phone. Competitive lenders can deliver nearly identical rates to each other. Most borrowers don't ask the right questions and focus only on the interest rate. Try to think MATH and as it pertains to you. That's all that matters.

Is A Direct Lender Better Than A Mortgage Broker?

NO!

First, if a couple of lenders were always the cheapest, everyone would eventually know about them, right? Over the last several years, we have seen amazing advances in home mortgages. Today’s homebuyer has the widest variety and the most unusual types of loans ever available. Mortgage brokers have dozens more of these loan programs for customers than any single lender. And most of the time, they can provide better deals. This is because they represent the WHOLESALE rates of these lenders. These are rates and fees not available to the public. For example, ABC Bank might be quoting you 5.5% and 1 point for a loan. A broker representing the very same bank can also quote the same rate and fee. The broker is probably paying NO points for that loan. They add the point back and keep it for themselves. They can also quote ¾ of a point and beat the retail quote of that bank. This is the essence of broker competitiveness. The “best deal” is always changing from lender to lender. A broker has so many sources and receives so much up to date pricing, you are more likely to save money than not. Next time a big national lender tells you that the broker is only a middle man and therefore cannot beat their deal, get it in writing.

The bottom line is that there is no one source that is the cheapest. The only other way most lenders can compete with one another is to somehow convince the public that they have some "secret way" of providing lower than market rates. The market is the market and you pay for it one way or another. Work with a mortgage professional that can explain it all in make sense terms.

How Do I Get The Best Rate?

It is NEVER about the best rate.
IT IS ABOUT THE BEST MATH, PERIOD!

There is NO other answer than that.

I was recently working with a couple with very high incomes and FICO scores. The husband was a long time friend of mine whom I told early on, that I DO NOT play the rate shop game. That I am trusted by my clients as their mortgage planner and advisor. It was not until I had gotten deep into the negotiating process with several of my investors and had developed several options from which they may choose, that I was informed that they (he), had selected another lender who claimed to have a lower rate. In fact, the rate was only 1/8th lower than mine. However, they were charging one point (1%) origination on the loan plus an additional $2,500. When I asked, "If they are charging you 1 percent to originate the loan, what was the additional $2,500 for?" He said that he was not paying for an appraisal nor a credit report.

He and I negotiated one point too but I was not charging an additional $2,500! I knew immediately what he WAS paying for. He was paying to buy that rate down! An appraisal for his home would have cost $350 while the credit report would have cost $50... if that much. So he was paying $2100 to buy the rate down 1/8th of a point! I suggested he ask them why the $2,500 fee and he still decided to go with them; This after they delayed closing his loan for 3 months which cost him a full point on his rate by the time he talked to me. BAD DECISION! Frankly, his decision made absolutely no sense financially. Still, I recognize a persons right to make a bad decision. Obviously he did not trust me.

Here is the deal. First, lower rates come with more points and fees. That's not the real issue either. There is a break even point to contend with when paying points and fees, tax deductions to figure out and your available cash. In the case of a purchase loan, points are tax deductible in the year that you pay them. That is good, but then again, so is the interest you think you are saving. With a refinance, the points are usually only deductible over the full term of the loan. That could be 30 years, making the benefits and the break even point years down the road. So why do so many lenders advertise really low rates with all of those points and fees? Because they know most consumers look at the rate, not the math. That advertising strategy works really well. How about the lowest APR? Often, the more points you pay, the lower the rate and APR. True, but not the answer. Get that loan officer/application taker to take apart each rate and fee quote to find out what the best MATH is for you, period!

It only takes a few seconds for the professionals at The Mortgage PRO! to do it. We are "Mortgage Planners" and "Trusted Advisors." After that, it's your decision.

Dollars don't just make "cents," they can make you wealthy! Trust and Integrity is EVERYTHING!

Comments from a Road Trip to Palm Springs