Archives for July 2011

The Mortgage Hot Potato: High Balance Loan Amounts

Hotpotato If you're a subscriber to my blog, then you are probably already aware that conforming loan limits are going to be reduced in late September and that banks will issue their own deadlines in advance of what Freddie, Fannie, FHA and VA have established.

Fannie Mae's FAQs state they will continue to purchase the "temporary" high balance loans as long as the note date is September 30, 2011 or earlier. Lenders will not allow that much time as being caught with a loan that exceeds what will be the new loan limits is having an unsaleable loan to Fannie or Freddie.  It's now a jumbo/non-conforming.  Banks and lenders have to provide an earlier deadline in order to not get caught with a "hot potato" which will cost them dearly with the difference in pricing and guidelines. 

The difference in interest rate for a 30 year fixed with a jumbo and high balance conforming loan amount is around 0.50 to 0.75% in rate.  This morning, a conforming high balance rate for a 30 year fixed is currently 4.625% (apr 4.735).  If a lender wound up being stuck with a "hot potato" loan that had a delayed closing and/or late delivery, and they had to sell it as a jumbo, in order to buy the rate of 4.625%, it would cost (based on current pricing) around 1.75 – 3.5% of the loan amount to buy down the jumbo rate to the note rate.  For example, if a lender is stuck with a conforming loan on a King County property in the amount of $506,001, we're talking a cost of $8,850 to $17,700 depending on the lender.  If this loan does not meet jumbo/non-conforming guidelines, such as having mid-credit scores below 720, it will cost the lender even more. 

Earlier this week, I received proof of this from one of the lenders we work with:

All loans approved and expected to close under the current loan limits must close, fund, disburse and be delivered in purchasable form no later than Friday, September 30, 2011. THERE WILL BE NO EXCEPTIONS. Please review current pipeline and new applications as there is no guarantee as to Super Conforming limits if the loan disburses after September 30th.

In order to "deliver" a loan to this lender by September 30th, a mortgage company would actually need to "close, fund and disburse" about 10 days earlier to their deadline to avoid being caught with the "hot potato".  If you have a loan amount that is in the gap between current high balance limits (which have actually always been "temporary") and the new loan limits, you need to close your transaction by mid-September to be safe.  In the greater Seattle area, this would consist of loan amounts between $506,001 and $567,500.  Here's a list of the other counties in Washington that will suffer a drop in conforming loan limits.  

By the way, this doesn't just apply to conventional loans, FHA loan limits are dropping effective October 1, 2011 too.  I have not yet received a memo from lenders we work with stating what their cut-offs are.  I expect it will be the same as conventional loans – plan on closing by mid-September or risk not being able to close.

I'll post more information as more banks and lenders issue their deadline. Meanwhile, if you are considering refinancing or buying a home and your loan amount fits into this "gap" between the existing limits, you may want to contact your local mortgage professional now if you want to avoid having a jumbo loan.

As always, I'm happy to help you if your home is located anywhere in Washington, where I am licensed.

UPDATE August 4, 2011: Another bank has issued their conforming high balance deadlines:

All loans using the ARRA loan limits must be locked on or before Thursday, September 15, 2011. These loans must be closed and funded no later than Friday, September 23, 2011.There are no further delivery requirements.

Buying a Waterfront Home in Washington

Are you considering buying a waterfront home?  The greater Seattle area has some beautiful neighborhoods located along the Puget Sound, including West Seattle’s Alki neighborhood, Ballard, Magnolia, Normandy Park and Des Moines, to name a few.

The Talon Group (absorbed by First American Title Insurance Company) has created a great video that discusses buying waterfront property on homes located in Washington State. Chief Title Officer Tim Daniels addresses tide lands and what to look for on your title commitment when buying waterfront.

Nice life vest, Mr. Daniels!

Self Employed Borrowers should seek an Experienced Mortgage Professional

I recently closed a transaction for a nice couple who buying a home in Edmonds. They had been working with a large bank for almost a month and they were not able to provide loan approval. My clients forwarded me their loan package from this bank and it was amazing to see what a poor job they did completing the loan application. So much information was missing or miscalculated with their incomes.  After reading this article in the Seattle PI stating that 25% of loan applications taken by large lenders were declined, I have to wonder how many of those applicants are self-employed borrowers in the same boat as my clients? I would also love to know the experience levels of the mortgage originators who were ap-takers trying to originator those declined loans.  I'm coming to the conclusion that many mortgage originators, processors and underwriters heavily relied on stated income loans for self-employed borrowers because they were easier to process.

Determining income of self-employed borrowers is not as easy as someone who has a fixed annual salary; but it doesn't have to be that hard! Stated income or low doc loans, which were created for this type of scenario, are gone.  There is more documentation required, including a minimum of two years tax returns (business and personal) with all schedules.  Lenders are looking for trends that your business and income are steady or improving.  Be prepared to provide plenty of documentation.

If you work with a mortgage professional who is experienced with reading tax returns, you're going to have much better results. I think it also helps to work with someone who has underwriters on location. It seems like many of the larger institutions have pooled processing and underwriting that is often not located at the mortgage originators location. If exceptions are needed, it's not unusual to find management (if not the processors or underwriters) located out of the area.  

As a Correspondent Lender, our processing and underwriting are done under one roof at our main office in Kent.  I've worked with our lead underwriter for over eleven years at Mortgage Master Service Corporation.  If you're self employed, I'd love to help you with your next mortgage for your home located anywhere in Washington.

Home and Garden Art in Seattle

Just north of Ballard in the Crown Hill neighborhood is a delightful shop: Home and Garden Art. I stopped by in search of a semi-sphere trellis for two tree camellias we have in our garden, which I didn't find…however, I loved what we discovered. You'll find everything from rustic arbors to painted singing frogs and everything in between.

Home & Garden Art is located at 1111 NW 85t Street in Seattle.

The Difference One Dollar Makes: Conforming vs Jumbo Rates

This morning via Twitter, Talon Title asked me what the difference in rate is between a conforming and jumbo mortgage. Currently, as of October 1, 2011, the jumbo loan limit is set to be reduced unless Congress passes an extension.  In the Seattle area, the loan amount for jumbos will be anything over $506,000 (currently the loan limit is $567,500) for a single family dwelling. Ben Bernanke has stated that private banking will step in to finance these borrowers needing a mortgage over the conforming loan amounts…this is at a price.  He doesn't feel this will squeeze those borrowers out of the market.  I wonder if this will squeeze more buyers into adjustable rate mortgages.

Here's the difference in rates based on current pricing (as of 8:30 a.m. on July 14, 2011) with 740+ credit and an 80% loan to value.  We know the difference in the greater Seattle area between a jumbo and conforming rate will be $61,500 in down payment or equity.

Conforming loan amount of $417,000 or lower.

30 Year Fixed:  4.500% (apr 4.602).  

5/1 ARM: 3.000% (apr 3.292).  With 5/2/5 caps, this product is fixed at 3.000% for 60 months (P&I $1686) and then may adjust up 5% to 8.000% at the 61st payment (P&I $2744) or as low as 2.25% (P&I $1114). The rate will continue adjust up or down no more than 2% annually on the anniversary date and may never be higher than 8% or lower than 2.25%. Based on a $400,000 loan amount.

Conforming High Balance loan amount of $417,001 to $567,500 (for King County, Snohomish County or Pierce County).

30 Year Fixed:  4.625% (apr 4.602).  

5/1 ARM: 3.875% (apr 3.912).  With 5/2/5 caps, this product is fixed at 3.875% for 60 months (P&I $2379) and then may adjust up 5% to 8.875% at the 61st payment (P&I $3786) or as low as 2.75% (P&I $2102). The rate will continue adjust up or down no more than 2% annually on the anniversary date and may never be higher than 8.875% or lower than 2.75%.  Based on a $506,000 loan amount.

5/1 ARM: 2.875% (apr 3.231).  With 5/2/5 caps, this product is fixed at 2.875% for 60 months (P&I $2099) and then may adjust up 5% to 7.875% (P&I $3420)at the 61st payment or as low as 2.25% (P&I $1953). The rate will continue adjust up or down no more than 2% annually on the anniversary date and may never be higher than 7.875% or lower than 2.25%.  NOTE: 5% additional down payment (75% LTV) is required for this scenario. Based on a $506,000 loan amount.

Non-Conforming – Jumbo loan amounts $567,501 and higher (until October 1, 2011).

30 Year Fixed:  5.250% (apr 5.371).  

5/1 ARM: 3.875% (apr 3.904).  With 5/2/5 caps, this product is fixed at 3.875% for 60 months (P&I $2669) and then may adjust up 5% to 8.875% at the 61st payment (P&I $4246) or as low as 2.75% (P&I $2358). The rate will continue adjust up or down no more than 2% annually on the anniversary date and may never be higher than 8.875% or lower than 2.75%.  Based on a $567,501 loan amount.

Let's pretend that it's October 1, 2011 and that the changes to conforming loan limits are in place and somehow, mortgage rates are exactly the same as what I've quoted above.

The difference between the conforming high balance and jumbo rates are currently 0.625% in interest rate with the 30 year fixed mortgage. A loan amount of $506,001 or more (proposed future jumbo) would have a $193 higher mortgage payment with the jumbo rate over the conforming high balance based on rates above.

Are people going to stop buying homes that are in the current conforming high balance price range?  I don't think so… I do think that when the conforming loan limits are reduced later this year, it will cause some to select mortgage programs they might not have considered such as adjustable rate mortgages or piggy-back second mortgages.  It seems to me that Congress should allow the temporary higher loan limits to stay in place until housing becomes more stable.  There was some discussion during testimony yesterday by Congressman Miller in California, however as I mentioned, Ben Bernanke doesn't seem to think that the reduction in loan limits will impact housing significantly.  We'll know more in a few months…and don't forget, Fannie has issued "warnings" via their FAQs that we may see loan limits further reduced effective January 1, 2012.

Just for fun… since we're pretending to be in the future, here's a trip down 80s memory lane: 

Ben Bernanke’s Testimony to Congress

As I write this post, Fed Chairman Ben Bernanke is before the Financial Services committee of the House for the Semiannual Monetary Report to Congress. 

From his prepared testimony:

"…the ongoing weakness in home values is holding down household wealth and weighing on consumer sentiment."

This is why I feel so strongly that the Home Affordable Refinance program (HARP) should not require appraisal for borrowers who qualify based on credit, income and employment. The home is already depreciated, why not allow the homeowner to reduce their mortgage payment and possibly prevent a foreclosure?

Case in point, one of my clients in Federal Way contacted me to refinance their home. They are being relocated out of state and are converting their existing home to a rental since selling it right now is not an option.  They have a 5/1 ARM (set to adjust in 13 months) and are interested in a 7/1 ARM as they do not plan on retaining the home beyond 7 years. Their mortgage is securitized by Fannie Mae so they qualify for a Home Affordable refi which provides them a lower rate and allows higher loan-to-values (lower appraised values) for an investment property. With this proposed refinance, they are going to reduce their monthly mortgage payment by $389!  That's more money in the economy and helps this family manage having a rental with their relocation scenario….then we receive the appraisal which comes in lower than anticipated. 

Now my clients options are to (1) bring in cash to closing by reducing the loan amount to 95% of the appraised value (what's allowed with a HARP refi for investment properties) or (2) cancel the transaction. They elect to cancel. It just doesn't make sense to invest more in the home with the relocation especially with the timing of the relocation.  

More from Bernanke's prepared testimony:

"Mortgage interest rates are near record lows, but access to mortgage credit continues to be constrained. Also, many potential homebuyers remain concerned about buying into a falling market, as weak demand for homes, the substantial backlog of vacant properties for sale, and the high proportion of distressed sales are keeping downward pressure on house prices."

Allowing Home Affordable refi's to be more like an FHA Streamline refinance by not requiring an appraisal would also help stabilize home values by preventing additional homes from becoming distressed.  

These are highly qualified borrowers who want to keep their property (would prefer to sell but cannot) and who want to take advantage of low mortgage rates. It makes no sense to me that appraised values are factored in when the rest of transaction is strong.

This is a solution that could really help our housing recover.

Got Droid? Check out MY new favorite app: The Mortgage Porter

DSC00730 I'm pleased to announce the release of my first ap for smart phones, specifically Androids (I'm hoping to follow up with one for iPhone soon).

Currently* from this app, you can contact me or connect via Facebook. There's also a mortgage calculator, convenient links to my blog and favorite posts AND a button to start the preapproval process.

Just another way for us to keep in touch and for you to refer friends, family members or co-workers who are considering obtaining a mortgage for their home located in Washington.

*This is brand, spanking new and I'm sure we'll be tweaking it as time goes on. 

What features would you like to see?




West Seattle Street Fair

The West Seattle Street Fair (aka  West Seattle Summer Fest) is taking place right now (actually started yesterday) in "The Junction" on California Avenue.  If you've never been to the fair, it's a lot of fun, food, arts, crafts and music.  The fair ends tomorrow at 5pm and goes on until midnight tonight…so don't delay!