The Subprime Market Fiasco XIX

Happy (almost) spring. With warming temperatures and clearing skies, many of us are turning our attention to our most valued asset – our current and future homes.

This issue covers lost opportunities by borrowers; the real estate market; and interest rates.

Borrowers Miss Out on Billions in Savings
An interesting article appeared in the March 3 Wall Street Journal discussing how home owners are missing out on billions of dollars in lower interest rates due to their inability to refinance, or important to me their belief that they could not or should not refinance. According to their source, Credit Suisse, around 37% of all borrowers with 30-year conforming fixed-rate mortgages—who collectively hold about $1.2 trillion of home loans—have mortgage rates of 6% or higher. Many could reduce their rates by a full percentage point if they refinanced at current rates, about 5%. More than half could lower their rates nearly three-quarters of a percentage point.

The article discussed at some length many borrowers' inability to refinance – mortgages that are underwater, poor credit, loss of jobs etc. It also mentioned that in many instances borrowers could refinance but believed it was not beneficial to due to loan to values that increased to greater than 80%. This threshold is the level where borrowers are required to purchase mortgage insurance. What the article did not mention is that this should not necessarily be a deterrent to refinancing.

I performed an analysis on the relative cost of mortgage insurance expressed as an interest rate percentage on a 30 year fixed conforming mortgage at loans to value of 85% and 90%. I found the interest rate equivalent is .35% and .65% respectively, which when added to current low interest rates often makes refinancing well worth paying the mortgage insurance. In addition, when the combination of principal payments and or appreciating value brings the loan to value below 80%, mortgage insurance can be removed. Mortgage insurance on conforming loans is not permanent.
FHA mortgages allow financing up to 96.5% with the cost of insurance equivalent to only .55% expressed as interest. However there is also an up-front premium that is paid, although it can be rolled into the loan regardless of the loan to value.

I have refinanced many of my clients into loans with mortgage insurance that has proven to be very economically beneficial. If you would like me to provide you an analysis to determine if refinancing is worthwhile to you, please let me know.

The Housing Market
Final numbers were announced for the S&P/Case-Shiller Home Price Indices for December, and values across the 20 cities monitored can best be described as stabilizing. The 3rd quarter decline for the 20 cities was 2.5% from fourth quarter 2008. However, the rate of decline has slowed significantly each quarter. The annual rates of decline reported in the first, second and third quarters of the year were -19.0%, -14.7% and -8.7%, respectively.

As of the 4th quarter of 2009, average home prices across the United States are at similar levels to what they were in the summer of 2003. For the month of December itself, actual values decreased from November in 15 of the 20 cities, led by Chicago at a 1.6% decline. However, on a seasonally adjusted basis, values increased in 15 of the 20 cities, led by Los Angeles at 1.4% and followed closely by Phoenix, San Diego and Las Vegas. To view the S& P press release for December and the 4th quarter, please go to http://tiny.cc/Ccl0n.

New Home sales decreased by 11% in January to record lows. While this may have a positive effect of reducing inventory if builders elect to slow the pace of construction, it does have an overall negative economic effect. According to the National Association of Home Builders each new home built, for example, creates about three jobs for a year and generates about $90,000 in taxes paid to local and federal authorities,.

Interest Rates
Interest rates remain near record lows for conforming loans, but the Fed did reiterate earlier this week that they will discontinue their $1.25 trillion purchase of mortgage backed securities. Unlike other times they have mentioned the end of this program, there was no immediate increase to rates. This may be a positive sign that the private market is ready to step in and begin purchasing these securities upon the Fed’s exit. If so, rates may track ordinary economic trends and Federal Reserve interest rate actions rather than being influenced by government purchases.

• Jumbo Rates – The 30 year fixed is still the best “value” rate and depending upon loan to value and credit score is around 5.5%.
• Conforming Loans – While the 30 year is at or just under 5% for qualified borrowers, the 5 year ARM rate has dropped to 4% or under. The 7 year ARM has made a valiant return to value, and is often just .25% or so higher than the 5 Year.
• FHA – FHA loans are on par or close to the same rates as conforming loans for 30 Year fixed, 5 Year ARM’s and 7 Year ARM’s. I find this fairly remarkable given that they allow for a loan to value of up to 96.5% and are not driven by credit score.

What this means to you.
• Purchases – It is still predominantly a buyers market. This gives you the opportunity to make an aggressive offer, and negotiate inspection items fairly but aggressively. If you qualify for the first time home buyers tax credit or it’s addendum for buyers looking to move, remember the Purchase and Sale agreement needs to be signed by April 30th, and the purchase must close by June 30th.
• Refinances – You should always do (or ask me to) an analysis to see if it is worthwhile to refinance. There is no cost to do so. If you have been reluctant to inquire due to your loan to value, mortgage insurance payments can be part of the analysis.
• Contact me – I am happy to provide you a pre-approval letter or prepare a refinance analysis for you.

Please feel free to forward this newsletter to anyone you would like. I would also be happy to hear your opinions or answer any questions you or your colleagues may have. I can provide mortgages in all 50 states.

If you would like to see past postings, please visit my blog at http://gregorydwyer.blogspot.com

Kind regards,

- Greg