Perspective

In this village, a little boy was given a gift of a horse. The villagers all said, "Isn't that fabulous? Isn't that wonderful? What a wonderful gift!"

The Zen master said "we'll see."

A couple years later the boy falls off the horse and breaks his leg. The villagers all said "Isn't that terrible? The horse is cursed! That's horrible!"

The Zen master said, "We'll see."

A few years later the country goes to war and the government conscripts all the males into the army, but the boys leg is so messed up, he doesn't have to go. The villagers all said "Isn't that fabulous? Isn't that wonderful?"

The Zen master said "We'll see."

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Volatility in March and How to Properly Shop for a Mortgage.

This long but worth the read, the March market summary lends itself perfectly to the topic of “how to properly shop for mortgage financing.”

March was a little nutty to say the least. Bonds roared in like a lion going from 101.94 for the FNMA 4.5% bond up to 102.81 on 3/16/2011. Of course in sticking with the cliché, they went out like a lamb a saw that go from the 102.81 down to touch a low price point of 101.34 and then close the month at 101.69. So there was a 1.47 swing between the high and the low, or 147bps. To put that in context to rates, that means that for every $100,000 borrowed on a home loan, the cost of borrowing that same amount of money would have been $1,470 more expensive to borrow on the day that prices hit the low 101.34 than it was on the day prices hit the high of 102.81. That cost may have translated to a higher rate or to higher up front cost or some balanced combination of the two. Either way, I’m sure you can understand that in only a 31 day window, $1,470 swing in cost for the same amount of money borrowed by the same person is a pretty big swing! 

That would be like the cost of gas going from $2.50/gal on day 1, dropping to $1/gal half way through the month, hitting a new high of $5/gal before settling back around $3/gal at the end of the month. Now gas prices have certainly been volatile as of late but they don’t hold a candle to the mortgage rate environment. Especially when you look at a day like March 21 where to translate to the gas analogy it would be like seeing gas for $1.80/gal on your way to work, $2.50/gal on your way to lunch, $3.25/gal on your way back from lunch, and then $4.00/gal on your way home. That is literally what mortgage rates did on that one day.

That’s a prime example of how foolish it is when you are mortgage shopping to get a rate quote from someone, then call someone else the next day to get a quote, then a 3^rd one the following day….what are you comparing? NOTHING! The number way to properly choose your mortgage lender are by asking these questions and making sure the lender answers all correctly. The questions are below, the answers are in red.

1) What dictates mortgage rates? The price of mortgage backed securities. Not the 10 yr Tbill, not Fed Funds Rate, not the Discount rate, not Prime, not anything else. MBS and that's it. 

2) Do you have a system in place to monitor the market because I understand it’s been very volatile lately? Obviously you want them to say "yes." Ask them what that system is and how accurately have they predicted recent movements in the bond market.
3) What is the next piece of economic news that may influence mortgage rates? This obviously will vary but if they stammer, they're making it up so just use your intuition here and then check them against this blog. (Economic calendar for the month will be posted the first week of each month.) 

4) What are your set costs? Common sense, this is the one place where lenders will vary and that cost in most circumstances is fixed regardless of what the rest of the market is doing. 

5) What adjustments are going to come to my interest rates based on my credit, the property, the amount I’m borrowing, etc.? Check this blog for information on "Loan Level Pricing Adjustments" and you can guage the accuracy of their answer. 

6) What options can you give me for various ways to structure my home loan that will help me achieve the goals and objectives that I have set to ensure my family’s financial well-being? This is the most personal of the questions so make sure you like what the answer is. 

Your only real option if you are 100% rate shopping is to get those 3 lenders to agree to a conference call and have them simultaneously quote rates for your very specific and unique profile. (They will all need specifics on the property, your credit report (not you giving them the score, they will need their own report!), the time frame you wish to close, the intended use of the property, if it’s a refinance they will need to know the nature of the transaction (is it rate and term or are you taking cash out?) and the list goes on and on. So it’s very difficult to actually quote a rate without any information and it’s very difficult to compare a rate if you have been given a quote from someone and there is no background information at what was used for that quote.

I am constantly amazed by people that will give their mortgage business over to the lowest bidder when they are driving a $70,000 car, wearing $500 shoes, and do all their shopping at high end stores….they obviously pay for quality, or perceived quality, in all other facets of their life but yet when it comes to their $417,000 mortgage loan on their $600,000 house they are going to farm it out to the lowest bidder. I’m not suggesting you pay no attention to rate and fees, I’m simply suggesting that some value has to be given to guarantee of funding, gold standard service, expertise of the markets to properly position and structure debt favorably, etc. For a test case, pick the mortgage you want and remember your answer:

3.5% without a 1% origination fee.
4.25% without a 1% origination fee.
4.75% with a 1% origination fee.

Have your answer?

Well if you went with 3.5% and no upfront cost, that’s fantastic. It’s a 5/1 ARM and it might be your best fit but it may not because of the uncertainty of that rate after the 5 years is over. Do you have a plan in place? Have you discussed this plan with your mortgage professional and feel good about your ability to execute it and keep this plan in place so that the ARM works best for you? Maybe, but if you went with just the lowest bidder, you may be in trouble.

How about 4.25% without the upfront? Might be the way to go but it’s a 15 year fixed so it’s going to have a substantially higher monthly payment. Does it fit in your budget? Does it work with your other investment strategies? How does your financial planner feel about the reduced monthly cash flow that might be taking away from your IRA contributions? Hope you didn’t go with the lowest bidder.

If you went with 4.75% and 1% up front, that might be good because it’s a 30 year fixed. But what if you’re in medical school and you know that in 3 years you’re moving to do your residency? On just a $150,000 loan amount, you’re going to be paying $108.90/mo more, times 60 months = $6,534 total + $1,500 = $8,034 total that you would have paid that you otherwise wouldn’t have had you been talking to a true professional.

The point is, every person reading this may have come to a different conclusion as to which would make sense for their situation. This is why it is of the utmost importance to be dealing with a true professional rather than the lowest bidder.

Add into that the fact that on our worst day in March, you may have been quoted on a 30 year fixed at 5.125% and on March 16^th, you may have been quoted 5%. If you went with the lowest bidder, you actually got the short end of the stick. How’s that? Easy, I would’ve quoted 5.125% on March 9^th and that 5%, assuming that quote came only 6 days later, was actually a full .25% HIGHER than my rate on that same day. I was locking 4.75% on the afternoon of 3/16. Not that low before then and hasn’t been back there since then. So by going with your perceived “lowest bidder” on a $250,000 loan, you lost out on $37.93/mo savings which comes out to $4,551.16 over 10 years and $13,654.80 over the life of the loan and that is ONLY assuming they both close and close on time!! 


Often the “lowest bidder” can’t deliver the rate but can’t deliver the actual closing period and that means earnest money lost, additional expenses for rentals on storage/trucks/existing apartment/etc., not to mention the sheer disappointment that comes with being sold a bill of goods and then finding out too late that whole thing not only fell apart, but never really existed everything was based on the lowest bidder setting expectations that were never going to be met. Of course the chances of you getting in touch with them to ask why is right around the slim to none range..... The moral of the story is very simple, you get what you pay for!  

"Well I didn't have to do that the last time I applied for a mortgage....."

Well, this isn't last time!

How to

Successfully Get a Mortgage in 2011

Getting a mortgage in 2011 is a little more complicated than it has been in the past

due to the challenging economy and increased government regulation of the

mortgage industry. In fact, it's like a giant hurricane has swept through the housing

and mortgage markets, leaving chunks of debris and danger in its wake. But never

fear; that's why I am here! As your Certified Mortgage Planning Specialist, my role

is to walk by your side, be your personal guide, and set you up for success every

step of the way. Here are a few of the challenges that we will tackle together as we

navigate the danger zone known as the 2011 mortgage process!

New Good Faith Estimate

The US government has created a new version of the disclosure form known as

the Good Faith Estimate (GFE). The old GFE itemized all your closing costs and

illustrated your "cash-to-close" - the amount of cash you would need to bring

to the closing if you are buying a home, or the net proceeds you would receive

at the closing from a cash-out refinance. The new GFE lumps in your closing

costs under certain categories instead of itemizing them, and does not illustrate

your cash-to-close. Also, if the seller is paying closing costs or points on your

behalf, this is not reflected on the new GFE. In other words, it will look as

though you are paying these fees even though the seller is paying them. As

your Certified Mortgage  Planning Specialist, I go above and beyond the

government's minimum requirements for my clients. In fact, I have created

special systems and easy-to-understand forms to help illustrate the total costs

associated with the loan options available to you.

Please contact me for more details.

New Appraisal Guidelines

Most mortgage loans these days are either insured by the Federal Housing

Administration (FHA) or sold to Fannie Mae or Freddie Mac. This means that

mortgage banks and brokers need to follow the rules set by Fannie, Freddie,

and the FHA. In 2009, Fannie and Freddie adopted new rules surrounding

the home appraisal process. In 2011,  the FHA followed suit and implemented

many of the same guidelines. What this means for you is that the appraisal

process is going to be more stringent and inflexible, costly, and time

consuming than it has been in the past.

In fact, many appraisals now go through multiple layers of screening and

are handled by Appraisal Management Companies, resulting in higher costs

and fees. Also, loan originators are prohibited in most cases from ordering

appraisals or communicating directly with appraisers. Even so, it is important

to keep in mind that an appraisal is simply somebody's opinion of what your

home would sell for in today's market. Appraisers are required to consider

the selling prices of short sales and foreclosures in the local market when

determining the current market value of your home. This may result in a value

estimate that may not agree with your own opinion of what your home may

be worth. You and I are entitled to disagree with the appraiser and have a

different opinion, but the lending guidelines that we need to follow require us

 to use the appraiser's opinion when calculating your loan amount and strategy.

As your Certified Mortgage Planning Specialist, my commitment to you is that

I will help you understand the appraisal report once it is completed. If there are

any errors, I will do what I can to get them corrected. Most importantly, I will

work hand in hand with you to adjust the mortgage strategy as necessary if

the appraiser's opinion of value comes in below what you or I think your home

may be worth.

New Disclosure Rules

The US Congress has enacted some new laws, and the Federal Reserve Board

has issued some new guidelines that could delay the loan process. For

example, if the APR on your loan changes by more than 0.125% before the

closing, the lender needs to issue new disclosure forms and give you time

to review the new forms.

Here are just a few examples of what could cause the APR to change:

- You decide to lock in your interest rate or get a rate lock extension

- You decide to reduce your loan amount

- You are getting an adjustable rate mortgage and the index value changes

- Your credit score changes before closing, resulting in a higher rate or higher fees

- You decide to pay more or less points than what you initially requested

As your Certified Mortgage Planning Specialist, my commitment to you is that I

will help you avoid costly delays to the best of my ability by planning with you

ahead of time and setting you up for success. While I can't control everything

that happens during the loan process, I do have the experience to know what

pitfalls to look out for and help you plan accordingly.

Higher Credit Score Guidelines

As stated above, most mortgage loans these days are either insured by the

Federal Housing Administration (FHA) or sold to Fannie Mae or Freddie Mac.

This means that mortgage banks and brokers need to follow the rules set by

Fannie, Freddie, and the FHA - all of whom have issued stricter credit scoring

guidelines. I know it sounds ridiculous, but if your credit score is less than

740 (gasp!) you may get hit with higher fees if your loan is being sold to

Fannie or Freddie! Most of my clients are responsible individuals who take

pride in paying their bills on time and maintaining a good credit rating.

However, many Americans have recently been hit with unexpected financial

difficulties due to the challenging economy.

In fact, many credit card companies have reduced the credit limits on accounts

that have never even been late. This is causing credit scores to go down

across the board for people who have never been late on any payments in

their life! If you fall into this category, or if you have some challenges with your

credit score, you may get hit with higher costs when it comes to getting a mortgage.

As your Certified Mortgage Planning Specialist, I will work with you to evaluate

your options and point out strategies and ideas for increasing your credit score

and getting a great deal on your mortgage. Please contact me for more information

on any of these items and how they may impact your situation. As always, I am

here for you every step of the way. Together, we will make getting a mortgage in

2011 a very rewarding experience for you and your family!

The Future of Mortgage Lending vs. The Current Opportunity in the Market Today

No one can accurately predict the future so take into consideration certain aspects of this are opinions and assumptions. However, the basis for the overall idea is 100% factual and that being said the known vs the unknown always has to be where the decisions are made based on what level of risk the consumer is comfortable taking on. 

Lets look first at what we know FOR SURE without any bias added to the equation. We know that since 1972, the average 30 year fixed rate mortgage came with a little over 1% origination fee and an interest rate of 9.04%. Compare that to today's best execution of mid 4% up to 5% range (depending on what time of day you check....) and you know that 9.05% > 5%. That's something any 2nd grader can tell you. Not to mention that the high end of today's rates is with 0% origination so that's another big chunk of savings compared to the averages. 

Second, looking back just prior the mortgage meltdown that started in the late summer of 2007. The government stepped in with their Mortgage Backed Securities purchase program announced late '08 and starting in January of 2009. The average 30 year mortgage between '06 and the end of '08 was 6.29% compared to the average of 4.92% from 1/2009 through present day. Again, the 2nd grader knows that "6.29% > 4.97%" and the bottom line that these two points of interest show, long term money to purchase a large, appreciating asset is on sale. 

Third point that falls under the "fact" column is another big one. It's no secret that home values have dropped. Somewhere between 10% and 20% depending on what type of home it is and where that home is located. So lets use the low end of that for this post and just say home prices are down 10%. That's no good for anyone ordering appraisals to refinance but lets spin it in a positive direction and still state the facts. "Homes are currently 10% off." Any one who is a bargain shopper knows that a sale is always a good thing. 

Breaking this down using the low end of the average mortgage rate (6.29% average of '06-'08) and the low end of the discount on homes, 10%, lets just look at the 5 year time frame for added net worth. 

Buying a home for $250,000 with a 20% down payment.

* Down payment = $50,000 at closing.

* $200,000 loan amount at 6.29% on a 30 year fixed rate mortgage = $1,236/mo.

* $1,236 x 60 months = $74,160 total payments. 

* Balance in 5 years = $187,019

* $50k down payment + $74,160 total monthly payments over 5 years = $124,160 total invested.

* 2% appreciation per year would roughly be a value of $276,00 after 5 years. 

       ** Balance of $187,019 subtracted from value = $88,981 of equity in the home. 

In today's market, that same home discounted by 10% = $225,000 purchase price.

Using the same info as above as far as structure. 

* $45,000 = 20% down payment.

* $180,000 loan amount at 4.92% = $957.50/mo 

* payment x 60 = $57,450 total of payments. 

* $165,382 = balance in 5 years. 

* $45k down payment + $57,450 total of payments = $102,450 total cash investment.

* Since it's the same house, for the sake of comparison, the house is still worth $276,000. There has to be a period of "over-appreciation" in a short time frame to compensate for the current discount. Here is where most potential buyers would leave out a very key ingredient. You have to assume this in order to keep it as an accurate comparison. If you want to assume 0% appreciation, then the $250k number is used for both scenarios and the numbers still work! 

* $110,618 total equity in property. 

Summary is obvious at this point.....

$124,160 total investment from the first scenario - $102,450 from the second = $21,710 SAVED.  

$110,618 equity in 2nd scenario - $88,981 from the first = $21,637 in additional assets.

$21,710 savings + $21,637 additional assets accumulated = $43,347 total benefit. 

So the bottom line is that you have put in your pocket or kept in your pocket $43,347 over only 5 years by making the decision to purchase now rather than later when market conditions normalize. 

When the economy recovers the government will lift the artificial cap on interest rates pushing them back to more "normal" or average rates. 

When the economy recovers, unemployment will go down which means people will be working. History tells us that unemployment rates and the housing market directly impact one another so when people are back to work and making money, they are buying houses and pushing the demand up. High school economics was where we all learned the law of supply and demand so we know that when employment starts to build up steam, demand for housing will increase, when the demand increases, the price will too. 

Bottom line is that we're starting to see faint signs of recovery and with the recovery the sale ends on both housing and on the price of money. 

The window is starting to close, do you want to look back on today in 5 years and say "I wish I had $43,347 in my pocket right now" or do you want to look back and take pride in the fact you saw opportunity and you jumped on it? 

Why wait? Lets get it going!! 

3/16/2011 Press Release

http://www.midlandsbiz.com/articles/7528/

The Week Ahead

We have a busy week ahead of us and it’s coming on the heels of horrible news out of Japan. Things appear to be much worse than initial reports so our thoughts and prayers are with all those in need.

FOMC Announcement is due out at 2:15pm on Tuesday, we don’t expect any major changes to current policy. Fed Funds rate should remain the same and no changes to the QEII program are expected. We always want to pay attention though because the market does like to read into things so it’s always on the radar.

The rest of the week we’ll get PPI numbers, initial jobless claims and several other economic reports that the bond market will be paying attention to but for the most part, rates are stuck. The range of 4.875% - 5.25% on 30 year fixed rate mortgages is based on the fact that the current appetite on the secondary market is for the FNMA 4.5 coupon and until any real and sustained demand for the FNMA 4.0 coupon shows up, don’t expect to see 4.75% on the table without an expensive buy down or unnecessarily high lender fees. (FHA/VA/USDA is a different story and we’re tracking those bonds separately.) That said, any “waiting game” being played right now on a float/lock strategy is pointless and if borrowers are waiting to buy when rates dip further or when home prices dip further, they are making a huge and very costly mistake. Show them the cost of waiting and they will be off the fence immediately. I am happy to have this conversation with any of your clients.

My expectations for the week-

·         Rates remain in the 4.875% range barring any unforeseen shake up in the markets. (With the situation in Japan, it’s never easy to predict reactions from the financial world.)

·         I expect to see an uptick in applications this week for purchases. The smart buyers are talking to me before you show them a house. It will save everyone heartburn and headache later.

My expectations for the rest of March-

·         With the April 1^st deadline approaching for the new Loan Officer compensation rules, you may find loan officers at other companies “here today, gone tomorrow” and that may lead to some unpleasant processing and less than smooth transactions until the dust settles.

·         We all know the home buying season is gearing up and I would expect (especially if we get weather like this past weekend) things to be running wide open come the end of March. One thing to consider here is that going from slow to wide open always has it’s obstacles to overcome. Just getting back in the swing of handling multiple transactions is work in and of itself. You certainly don’t want to add into it the fact that most lenders and brokers are going to be scattered and totally comatose with the implementation of the new LO comp reform thanks to Dodd-Frank. Make sure you know who is closing your deals! There are more “gotchas” and hang-ups out there in the mortgage process than there ever has been before just with getting the borrower approved, it’s no longer cut and dry.

Quick Summary-

The world of mortgage finance is a completely different animal than it was 3 or 4 years ago, we all know that. The truth of it though is that the world of mortgage finance is a completely different animal than it was just a year ago and it’s still in the process of transformation. You cannot just go to an “Application Taker” at the bank and expect to walk out with financing that makes sense. If you want to truly service your clients in the best way possible, you will have them sit down with someone who knows how to take things to a level you may not be accustomed to yet. Someone that will take the time to truly construct a game plan for the short term. (Get us to the closing table, fund the loan.) Someone who will construct a game plan for the mid-range outlook, (accounting for planned expenses, job changes, additions to the family). Someone who will construct an overall, longer term, debt and asset management strategy that will help your client build and protect wealth by using their biggest asset, the home you sold them, as one of their primary tools in the arsenal.

March Calendar; Potential Rate Movers

Date                                         Report Due
3/3                                            Continuing Jobless Claims
3/3                                            Initial Jobless Claims
3/4                                            Jobs Report
3/11                                          Retail Sales
3/11                                          Retail Sales ex-Auto
3/11                                          Michigan Consumer Sentiment Index
3/15                                          FOMC Minutes
3/15                                          NY Empire State Manufacturing Index
3/15                                          Fed Rate Decision
3/24                                          Building Permits
3/24                                          Durable Goods Orders and Durable Goods Ex-Auto
3/25                                          Michigan Consumer Sentiment
3/31                                          Chicago Purchasing Managers Index.