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The Fed cut the short term interest rate by .5% today in a move to improve the housing market. The stock market responded with immediate gains of about 1.5%, showing a hopeful outlook for recovery and a soft landing for the wider economy.

From CNN Money, “The federal funds rate, an overnight lending rate that banks charge each other, is important since it influences the amount of interest consumers must pay for various types of debt, such as credit cards, home equity lines of credit and auto loans. The rate cut should help some beleaguered home borrowers who are set to see monthly payments on adjustable rate mortgages rise later this year.”

The immediate response among the lenders that I work with? Rates dropped in many conforming loan products. This should allow people who need to refinance to do so with a very attractive rate, and move into a long term product, especially for those who want to stay in their homes for the long haul.

 This past couple of months found a number of lenders closing their doors, and others including the largest lender in the nation, Countrywide, in tight circumstances.  Those that are still with us have made huge changes in the loan programs they are offering.  Gone are the days of low interest stated income, stated asset, 100% financing, or loans that are likely to lead to borrower default. 
This is a good thing

Better quality mortgage products equals a better financial outlook for each of you, our clients, assuring the future affordability of your homes.
I always watch daily  interest rates on conservative products—30 year fixed, for example has been hovering around 6.25-6.5%.  A very good rate.  If you are a W-2 worker, with good credit and reasonable income, assets and even a small down payment, you are the kind of borrower that lenders really want right now, and they show it by offering low rates to you.  If you are about ready to refinance, this would be a great one to consider.
Already, our lenders are releasing modified versions of some of the more versatile loans like the Option Arm, and Jumbo Loans with Stated Income. 
Reverse Mortgage:  a better tool than you might think
As the nation ages and baby boomers reach that magic age of 62, more and more of us will be interested in a product known as a reverse mortgage.   I am certified in reverse mortgage origination. 
In a nutshell, a reverse mortgage is a cash flow/income tool. Unlike ordinary home equity loans, a reverse mortgage does not require repayment as long as the borrower lives in the home. Lenders recover their principal, plus interest, when the home is sold or refinanced by the heirs. The remaining value of the home goes to the homeowner or to his or her survivors. If the sales proceeds are insufficient to pay the amount owed, HUD will pay the lender the amount of the shortfall.
To know more about this product or to consult with Lynette regarding mortgage financing, please call or email us.

GSE Changes Could Ease Mortgage Concerns
The two secondary mortgage market giants Fannie Mae and Freddie Mac could help ensure stability in conventional mortgage markets if the government would temporarily lift a restriction on how much in mortgages they can hold in their portfolios, NAR told a federal regulator in a letter sent jointly with the National Association of Home Builders and the Mortgage Bankers Association.

The main function of the two government-sponsored enterprises is to ensure mortgage market liquidity by buying mortgages from lenders and bundling them into securities for sale to investors. But Fannie Mae and Freddie Mac also buy and hold a portion of the loans in their own portfolios.

The companies’ regulator, the Office of Federal Housing Enterprise Oversight, limits this portfolio activity to a combined $1.4 trillion. Easing that limit would send a powerful signal to lenders and borrowers that mortgage markets will remain flush with liquidity, NAR says.

The Financial Services Roundtable, which represents large financial institutions, has sent a letter to OFHEO, saying that easing the portfolio limit makes sense given recent volatility in capital markets. Fannie Mae CEO Daniel Mudd has suggested raising the limit by 10 percent.

For now, no cap hike is planned, although credit availability will be closely watched going forward, OFHEO Director James Lockhart said in a letter to Sen. Charles Schumer (D-N.Y.), who sits on the Senate Finance and Banking committees and has called for a cap hike.

— REALTOR® Magazine Online

The news is all over the place–from my lenders I get daily updates with program changes, rate changes and borrower criteria changes.  Then I also hear– “bring us the mortgages anyway–we’ll get creative”.  I’ll be honest with you–it is not as easy to get a loan as it used to be in recent years.  So — OK — they’re more realistic now, and we won’t find ourselves two years later with an outlandish payment we can’t afford. 

This blurb came to me from Realtor Magazine: 

Borrowers with good credit but without 5 or 10 percent to put down are likely to be shocked at the rate they’re offered, if they’re offered a mortgage at all.

Lenders are eliminating certain products altogether as well as requiring higher credit scores and down payments, more extensive appraisals, larger savings accounts, and additional income verification.

To Washington state appraiser Bill Hanson, the shift is dramatic. He says lenders are “asking for unrelated information, such as permit numbers for remodeling work,” he says. “Before they would ask: ‘Is the home still there and does the roof leak?’”

“We thought the dust was going to settle, but instead, it just blew up,” says Mitchell Reiner, president of Mortgage Associates, a Los Angeles-based lender that does business in 48 states. “Everyone is being affected.”

Source: The Wall Street Journal, Jonathan Karp (08/14/2007)

This article came to me in a newsletter, and I share it with you:

Industry visionary Stefan Swanepoel speaks out

RISMEDIA, August 13, 2007–The public media this past week headlined the apparent surprise “mortgage meltdown” as many reported the filing for bankruptcy protection by the nation’s 10th-largest residential financer; American Home Mortgage Investment Corp., Melville, New York. Real estate, contradictory to its glamorous profile a year or two ago, was again headlined but this time as the big bad wolf. So is this the end of the real estate mortgage Merry-Go-Round? Probably not, as I haven’t heard “a certain lady sing yet!”

So what’s happened? The sub-prime mortgage meltdown has spilled over into other areas of the residential mortgage market, including the jumbo market. For example Wells Fargo, one of the nation’s biggest mortgage lenders, recently raised the interest rates on it 30-year, fixed-rate, non-conforming jumbo loans to 8%. Overall the interest rates on these so-called jumbo loans have risen nearly 25 basis points in the past week, and are up nearly 100 basis points over the last 90 days. Concerns are even entering the commercial arena as increasing speculation among the hedge fund fraternity notes that the greatest risk may be for mortgages issued at inflated price levels in the commercial real estate market.

Ah, so what do we have today? A “Mortgage Meltdown” as the media, both in print and TV, has labeled the fiasco. This is largely based on the fact that market conditions in both the secondary mortgage market and the national real estate market have deteriorated to the point that many mortgage businesses are no longer viable or as profitable as before.

But then maybe they should never have been in business or should be penalized for not preparing for a shifting market. Only the foolish could really have believed that the “gravy train” was going to ride in perpetuity. Numerous prominent blogs warned about the bubble. Yes some were a bit over the top but many spoke the truth; we were forewarned. In the 2007 Swanepoel Trends Report published back in January dedicated an entire chapter to what it titled “The Bubble, Exotic Loans, Fraud and Declining Commissions have created The Hangover.”

But just like in the new CBS reality program “The Power of 10,” greed on the side of home owners, and of course mortgage brokers, lured millions of homeowners with the promise of irresistible low monthly payments and the illusion of owning the “American Dream” – whether they where qualified for it, or not.

So now, or soon, as millions of homeowners experience the clutches of the financial vice-grip tightening we have a market that is in a quandary. The result will most likely be a continuing rise in the number of delinquencies and foreclosures, particularly among low-income borrowers in conjunction with a declining housing market in many areas across the county.

With an estimated $130-billion in mortgages that have payments being reset this year, the adjustable-rate mortgage, once a solution, is now a ticking time bomb. These homes seemed affordable when house prices soared and home equity credit lines were the ticket to luxury cars, swimming pools and overseas trips.

But now the Pied Piper has come to collect. You can’t live in “Never-Never Land” forever. Borrowers are now getting a lesson in what the words “adjustable,” “deferred” and “balloon” really mean. The resulting ripple-down effect is placing even more pressure on declining property values.

However, what is surprising is that in those areas where housing prices have already stalled or fallen, many people appear to be truly flabbergasted and shocked; looking for someone to blame. Valid or not, Realtors as well as mortgage brokers may carry the proverbial “bulls-eye” on their back as many search for a scapegoat.

Realistically of course, house prices had to come down. It is simple economics 101 - supply and demand. If there are more sellers than buyers the market will be flooded with homes that simply won’t sell until prices drop and they become affordable again for the early phase speculators and opportunists.

According to Allen Fishbein, director of housing policy for the Consumer Federation of America, “What happened in a lot of expensive real estate markets is that first-time home buyers who felt they could not afford a home otherwise, took on a loan that had lower monthly payments than a traditional mortgage would have.”  That means borrowers who can’t afford their payments can’t count on being able to sell their homes, while lack of price appreciation means many don’t have the equity in their homes they need to refinance at a good interest rate. Both factors make foreclosures more likely.

But maybe it’s not all that bad as the doomsayers say it is. According to the Mortgage Bankers Association, overall, 4.41 percent of mortgages are delinquent, up from 4.34 percent a year ago, but lower than they were three years ago. So, that means 96 percent of mortgages are being paid on time. That’s not too bad – we are still far from a real “Meltdown” as the media painted our industry this past week.

Good it’s not -but a meltdown it isn’t. Let’s just say we are in a much needed correction for a real estate and mortgage market.  Markets that have been too strong for too long.  At the same time, however, the market creates numerous opportunities to grow a business and gain market share. As with any trend or change, knowledge is the key and being pre-warned is also strategically smart.

Interest and Tax Deductions

If you itemize deductions on your federal income tax returns, you may be able to deduct all the interest you pay on your mortgage loan.  (We are not tax professionals. Please consult one for your own situation.)  I have created a table that shows actual interest rates you may be paying on your mortgage and the effective interest rate based on your tax bracket.  For example, you have a 7% mortgage rate and your tax bracket is 15%, then your effective rate is actually 6% after interest deductions.

Link to Table

Today I spoke with the young lady at our optometrist’s office about the real estate market.  She asked how the market is, and then wanted to know if prices are going down.  I’m sorry, but the answer is no.  I haven’t really seen a bursting bubble. Prices will increase over time in the Seattle area at a rate of at least 7% a year.  That means that homes will be twice as valuable (or more), and yes, twice as expensive (or more) in ten years.  So that begs the question, when should you buy?  You should buy as soon as you are ready.

Think about this, though:  if all you are looking at is home prices, you are looking at only part of the picture, unless you have cash for the whole purchase price.  The other part of the picture is the rate/terms of your loan, or how much your money costs. 

See, you qualify for a payment amount when you are applying for a loan.  When the interest rate is higher, more of your payment goes to pay your interest, less to cover the house price, so you get less house.  The inverse occurs when the rates are lower.  We like lower.  So when you are ready to buy, the thing to watch is interest rates.  You also want a loan officer that will quote a reasonable rate (not the teaser that can’t possibly be honored) and keep you informed about rates until you are ready to lock it in, once you are under contract. 

Our friend mentioned that she might want to get a place with more bedrooms than she needed in order to rent to roommates.  I told her that there are loans that will use the rental amounts as income to help qualify the borrower.  Not all lenders allow that income to be used, but if you can afford a place then you use the rent income to give you a financial cushion, well that can be a good conservative move. 

Though it might start out a bit more expensive, the larger (3 bedroom) property appreciates at the same rate as others around it.  I would rather have the equity growth on a $300,000 house than a $200,000 house, yes?  And if you own a three bedroom instead of a two bedroom, and the next step in your strategy is to move up into a nicer place, it will be easier to sell.  Or rent.  Hmmmm…. another avenue to take. 

Another young future client is working with me on building her credit and job history right now, and plans to own a building that houses not only a dance studio, but apartments to rent.  These are ambitious plans, and what a great idea! 

I’ve lifted this right from Jillayne Schlicke’s (http://www.bpiconsulting.net) newsletter because I thought you ought to know…

Alert to homebuyers to look for the license number of their loan originator on their loan application after January 1, 2007.

On this date all loan originators who work for a mortgage broker must be licensed by their regulator, the Washington State Department of Financial Institutions. This includes being fingerprinted and undergoing an FBI background check.  Loan originators will be issued a license number by the state which must appear on your client’s loan application.  This new licensing law does not affect loan officers who work for a bank, credit union, consumer finance company, or any other entity exempt from licensing.  Here is a link to the DFI website for you and your homebuyers.
http://dfi.wa.gov/cs/loan_originator.htm

I want to continue to help people with financing their home purchase and so I have applied for my mortgage loan originator license–a new development in the State of Washington.  It’s a great move onthe part of WA State toward regulating individual competence and compliance.  I was known as the compliance officer at my last job, watching my agents and loan officers for possible problems, protecting clients, and my associates as well as the brokerage—-the real estate brokerage and the mortgage side too.  As RE broker, being compliance officer was part of my job.  I was to be very aware of the laws, to feel when a red flag might be flying and to check out that possible violation.  Often when an agent or LO thinks outside the box in advertising, or in getting a loan for someone who really does not qualify, there’s a reason to check for violations. I’m all for creative advertising, and even creative financing, but not for anything that will end up hurting a client financially.