Since my last market commentary, we have continued to see unprecedented turmoil in both the mortgage and housing markets. After several months of frequent changes in mortgage guidelines, I am beginning to feel confident that we are settling in to the new market reality, and that the pace of change will slow. At least I am no longer looking over my shoulder on a daily basis to see what the next shoe to drop will be.
The shakeout from the sub-prime fiasco has not been pretty, and has had four major effects:
Mortgage products:
Sub-prime – virtually not existent
Limited documentation loans – Virtually non-existent
Home Equity Loans – Decreased maximum loan to value (LTV) allowed, reduced maximum debt/income ratios.
Prime Loans – Increased documentation and lower maximum LTV’s. The new LTV requirements are perhaps the most significant change as buyers may not have enough equity to put down on there purchases. In addition some borrowers who want to take advantage of the current refinance market cannot because the value of their home may have fallen, or the guidelines themselves have changed and they do not qualify under the new LTV’s.
Rates: While the Fed has continued to cut the discount rate over the last several months, and the 10 Year Treasury bill has dropped as well, there has not been a correspondent drop in rates. While they are still historically very low, there is a certain “risk premium” built into the rates, as investors are leery of mortgage backed securities. I see this weariness lightening up recently. Rates can be further classified into 4 separate categories:
Conforming Loans – These are Fannie Mae and Freddie Mac backed mortgages up to an amount of $417,000. Fannie Mae and Freddie Mac have recently introduced risk based pricing where you are either rewarded or punished for loan to value and credit score. The lower the LTV, the better the rate, the higher the credit score the better the rate. The maximum loan to value is typically 92% - 97%, but may be 5% less depending upon whether you are in a “declining market”. This will be address later in the update.
Jumbo Conforming – Fannie Mae and Freddie Mac have finally acted upon the much reported temporary increase in conforming loan limits above the $417,000 traditional loan limit. This increase is for 30 and 15 year fixed products, and the limit varies depending upon the county you live in. In high cost areas the limit may be as high as $729,750. Although there is a slight premium above the traditional conforming loan rate, it is a great alternative to Jumbo loans, and should be of particular interest to any borrower with an Adjustable Rate Mortgage in this loan range who is interested in changing to a fixed rate product.- Jumbo Loans. – There is still little if any secondary market for Jumbo mortgages (>$417,000), and most banks are keeping these in their own portfolio. The 30 year fixed is priced a full point above the conforming loan limit, which is about .5% higher than historical differences. The 5 Year ARM has very good pricing.
- FHA Loans. They are back – and without stigma. The government has really stepped to the plate on this one. Loan limits have been increased (again depending upon county), the rates are in line with conforming rates, they are not credit score sensitive (although you need a recent history of timely payments), and you can borrow up to 97%. It is even possible to finance 100% of a purchase. There are no income maximums.
Housing: There is no denying that housing has continued to decline, and it is unclear if we have reached the bottom. The selling of foreclosed homes in certain areas has brought down values, and the tightening of credit criteria has taken some buyers (demand) out of the market. However, real estate is still local, and some areas are stable or increasing, even within “declining markets”. The pace of decline in new housing starts is beginning to slow, and hopefully will soon reach the level which in the past two housing downturns marked the end of the decline.
So what does it all mean to you?
Now more than ever, know yourself, and know your property or contemplated property. Rates are still historically very low, but it is very important to maintain solid credit, and to be able to document all income and assets. This will help both in getting approved for the loan and your rate.
Find out if your current home or the one you are contemplating buying is in a “declining market”. A declining market is one determined by Fannie Mae or a bank and is determined by economic forecasts that their will be continual decline. If the property is in a declining market, maximum loan to values are reduced by 5%. The declining markets are based upon county and not zip codes. As stated before, there are stable and increasing areas within these counties, but the county findings stand. If you are interested in whether you are in a declining market, send me your county and state and I will let you know.
If you are purchasing, keep your pre-approval letter up to date, and make sure it comes from the bank providing the loan, and not a broker. As underwriting criteria changes, if you qualified for a loan yesterday, you may not today. It is important that your lender stays on top of your file, and knows the guidelines.
If you are considering refinancing, be prepared to act swiftly. Rates are incredibly volatile, and change daily, and often inter-day. A rate that you thought may be available to you at one point in time can quickly go away. If you have not joined my rate watch program, please do so. I have successfully refinanced a large percentage of those who have joined my rate watch, as I have automated a daily rate watching program for them – when the rate reaches their desired target rate (typically .25% or better below their current rate, with no points and no closing costs) we pull the trigger. For more information, please read my past posting specifically on the rate watch program.- Be prepared for continued rate volatility. Even the hint of a stengthning economy or inflationary fears creates quick unfavorable rate increases.
As always, please feel free to pass this email along to any friends, family or co-workers who you feel may benefit from the information. And please feel free to contact me with any questions and comments. If you are already working with a Chase Loan Officer, please continue to support him or her.
greg.d.dwyer@chase.com
Disclosure: The opinions expressed are my own and do not represent the positions, strategies or opinions of JPMorgan Chase.
