Yesterday, the US Senate passed HR 5140, the $151 billion dollar economic stimulus package; the US House of Representatives passed a similar version last week. The House and Senate worked out the differences and now HR 5140 is sitting on President Bush’s desk awaiting his inevitable and prompt approval; we expect approval by early next week.
Part of the package includes a temporary increase in conforming loan limits from $417,000 to 125% of the median home price in a specific area, not to exceed $729,750.
What does this mean to you? Any loan amount above the conforming loan amount of $417,000 is considered a Jumbo loan and, unfortunately, comes with a premium on the interest rate. With the passing of HR 5140, loan amounts up to 125% of the median home price will be available at conforming loan interest rates. This is good news for anyone needing to refinance or obtain financing to purchase a home with a loan amount between $417,000 and $729,750.
The median home price will be determined by the U.S. Department of Housing and Urban Development (HUD). HUD has 30 days to come up with a list of the median home prices across the nation then, multiply the median price by 1.25. The result will become the new conforming limit, not to exceed $729,750. However, if the result of the calculation is less than $417,000, the conforming limit will remain $417,000.
For an approximation of the median price in your area, the Wall Street Journal published median home prices, click here.
This is especially good news for borrowers who took out jumbo loans after the beginning of credit crunch back in July 2007 when jumbo loan became very expensive.
Note: Borrowers who qualify to refinance will easily find a lender eager to earn a commission and perform the refinance, but just because a borrower qualifies to refinance does not mean it’s financially advantageous to do so.
Make sure to find a mortgage professional willing and able to calculate total loan cost over time for both your existing mortgage and the new mortgage. Comparing total loan cost over time will help you make the right decision when contemplating a refinance.
More Information: Bloomberg
This month the Milken Institute issued a series of three reports that take a different approach to evaluating the subprime lending crisis. Sure, foreclosures are rising and the real estate market is seeing fewer transactions this year. But are things really as bad as portrayed in the newspapers, internet blogs, TV and radio reports? Certainly not.
These reports make some interesting points concerning foreclosures, subprime mortgage products, interest-rate resents. The highlights are as follows:
Homeownership has been and remains an important part of our culture. From January 2007 through July 2007 subprime mortgage originations stand at 440,934 and of those, 13,272 have entered foreclosure status (Source: Milken Institute). That leaves 427,662 homeowners that wouldn’t be homeowners without subprime mortgage programs. And sure, some will most likely move into foreclosure with the rate resets. But look at that number, over 400,000 subprime borrowers own their home with good mortgage payment history. That’s encouraging. For many borrowers subprime mortgage products work very well. What’s wrong with allowing more people to own homes?
These reports also point out that “new mortgage products create learning curves on the part of both lenders and borrowers.” Loan officers do need to carefully match the right product with a borrower’s specific circumstances and explain each feature of the mortgage to the borrower. And borrowers do need to make sure they understand each feature of their mortgage. Once lenders and borrowers work through the learning curve the foreclosures associated with subprime mortgages will decrease. But they won’t go away.
Foreclosures have been and will continue to be a part of both prime and subprime mortgage markets. In fact, credit defaults are a part of all credit markets, i.e. car loans, credit cards, department store credit cards, furniture financing, etc. Many factors contribute to foreclosures, such as, divorce, disability, illness, and job loss. Whether or not subprime mortgages are a part of the mortgage marketplace, foreclosure will occur. And if subprime mortgage programs ultimately increase homeownership, why not continue to offer these products?
How to Determine Whether Your Loan Officer is Reputable
The National Association of Realtors (NAR) third quarter Metropolitan Area Existing-Home Prices and State Existing-Home Sales report shows that Nevada sales declined by 35.3% from Q3 2006 to Q3 2007 and that the Las Vegas metropolitan area median price for a single family home declined by 7.1% over the same period. The numbers speak for themselves; real estate has slowed down in southern Nevada.
In slower markets, some loan officers may feel pressured to close deals that aren't in the homeowner's best interest. In order to avoid getting into difficult and financially compromised positions with their mortgages, borrowers are well advised to be acutely aware of the signs of a responsible loan officer when selecting a mortgage professional.
First, look for a Mortgage Planner whose values are focused on helping individuals to achieve their financial goals in both the fastest and the safest way possible. A reputable Mortgage Planner will show you the numbers associated with the proposed loan and provide you with concrete information that backs up his or her claims. Review all of the numbers. If they don't add up, ask for clarification. If your loan officer can't or won't answer your questions, move on--without the loan.
Secondly, a responsible Mortgage Planner will present you with financial information that goes beyond the point of the transaction, and will illustrate the total cost of the loan over time. If your loan officer is focusing only on rates and fees, you may be working with someone who's looking our for his or her own best interests, not yours.
Responsible Mortgage Planners will also tailor their strategies to fit your unique situation. In other words, they always take your personal financial goals into account. No one should try to place you into a loan without knowing the intricacies of your personal financial situation.
Finally, if your loan officer is advising you on issues other than mortgages, you could be working with someone who is compromising your best interests. Issues like investment rates of return and real estate appreciation aren't the areas of expertise for the vast majority of mortgage professionals and should be left to the professionals who have training and direct experience in those areas.
When seeking a loan officer, look for someone who specializes in mortgage planning, which is the process of evaluating a borrower's unique financial situation and advising the borrower on a loan that best suits his or her individual needs and goals. If your loan officer is trying to put you into a loan without evaluating how that loan will effect your entire financial situation--including debt management, tax benefits, investment goals and net worth--it's quite possible that you're only getting half of the picture.
The bottom line is that your mortgage representative should always be looking out for your best interests, regardless of market conditions.
How The US Mortgage System Works
Money for mortgages flows in a circle. First, money is loaned in the form of a mortgage. The mortgage is then turned over to a servicing company. The servicing company interacts directly with the borrow, issuing monthly statements, collecting payments, sending threatening letters when payments are late or not received, etc.
Next, the mortgage is sold on Wall Street where it's bundled with other mortgages, securitized and sold to investors as mortgage backed securities at the Chicago Board of Trade. Check your 401k or mutual funds, there's a good chance you own mortgage backs via those portfolios.
After receiving money from the sale of mortgage backs, Wall Street turns around and injects that money back into the residential financing system through mortgage banking companies, who loan it to people buying and refinancing residential real estate--completing the circle.
Ben Bernanke didn't shave his beard, but he did shave the discount rate by one half of one percent.
The last few months have seen a historically turbulent ride in the credit markets and the Fed stepped in last Friday to smooth the path ahead. The Federal Reserve Bank reduced the discount rate (not the Fed Funds rate) from 6.25% to 5.75% and extended the lending period from overnight to 30 days. What's happening and why did the markets need this help?
When a mortgage banker commits to lending money, $100,000, for example, to a home buyer or home owner, the mortgage company must bring $100,000 cash to the closing table. The mortgage banker gets this cash from a line of credit, called a "warehouse line". A warehouse line is a large line of credit mortgage bankers use to fund real estate purchases they commit to financing. In this example let's say the mortgage banker has a $100,000,000 warehouse line. Warehouse lines are provided by large financial institutions, like international banks.
Back the the $100,000 loan... The mortgage banker brings $100,000 cash to the closing table in exchange for a promissory note and deed of trust signed by the borrower. The banker then sells the promissory note and deed of trust on the secondary lending market for, let's say, $101,000. Now the banker, with $101,000 in hand from the sale of the note and deed, replenishes the warehouse line with $100,000 and keeps $1,000 profit. The mortgage banker is happy, the warehouse line supplier is happy, the borrower is happy because have their home, everyone is happy.
All this doesn't happen overnight. It takes time to find a buyer for the note and deed of trust and process the requisite paperwork. If the mortgage banker needs to replenish the warehouse line before finding a buyer for the note and deed of trust and the mortgage banker doesn't have the money to do so, the banker is in trouble and needs liquid cash, or liquidity. This lack of liquidity causes a credit crunch or liquidity crisis.
In our example, $100,000 isn't a lot and if it was only $100,000 the mortgage banker could easily handle replacing it on the warehouse line. A mortgage banker, however, may fund hundreds, maybe thousands of loans every day. So the warehouse line may need $10, $20, $30, $50 million or more replaced before the mortgage banker find buyers for all the notes and deeds. When this happens to the entire mortgage banking industry, a full blown credit crunch erupts.
If the banker had a bridge loan to replenish the warehouse line, the liquidity problem might be solved--Big Ben to the rescue.
As of last Friday, the banker can go to the Fed discount window and borrow funds for 30 days and replenish the warehouse line. Now the banker has 30 days to find buyers for the notes and deeds. The warehouse line is available to lend to another borrower and the mortgage banker remains open for business.
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