Dean's Blog

Homebuyer Alert…

For prospective homebuyers who are on the fence about making a home purchase, the next few months represent a countdown of sorts for two reasons.

The first of these, the coming expiration of huge tax incentives, may be a bit more obvious to most borrowers. April 30, 2010 is the last day to enter into a home purchase contract and still potentially qualify for a federal income tax credit of up to $8,000 for first-time homebuyers and up to $6,500 for repeat homebuyers. The credit can be claimed only on contracts that close by June 30, 2010.

Secondly, beyond the waning benefit of the Federal income tax incentive, another form of stimulus will soon disappear, as the Federal Reserve winds down a program that has been keeping home loan rates artificially low.

Rate Alert…

The lowest rates of 2009 were driven down to their attractive levels because of the Fed’s Mortgage Backed Securities (MBS) purchase program. Home loan rates have an inverse relationship with the value of MBS. When these securities trade higher on the market, rates move lower and vice-versa. So when the Fed originally agreed to be a big buyer, it helped provide a market for MBS, which helped keep prices high and, as a result, helped push home loan rates low.

And while the Fed continues that program through the end of March 2010, the reality is that the Fed‘s “extension” was really more of a rationing intended to prevent home loan rates from spiking as the program is phased out. It’s sort of like weaning the market off of its life-saving treatment instead of forcing it to go cold turkey.

Already, some in the media have mistakenly reported the extension of the program through March as good news, telling consumers that rates will continue to decline, and remain low into the spring. This gives a false sense of security that homebuyers and refinancers simply cannot afford.

The problem is…

Those reports do not accurately report what’s going on or where rates are really headed. That can have a very costly impact on consumers who may miss out on historically low rates if they listen to these media outlets.

Here’s what’s really going on…

In May 2009, the Federal Reserve's purchases of MBS peaked at an average of $25 Billion per week. As of November, the average weekly purchases dropped down to $14 Billion. At the end of November, the Fed had already used over 80% of the allocated funds for MBS, meaning less than 20% remained to be used over four months.

Making the problem worse is that the Fed now has less money available to purchase MBS while at the same time, the supply of these securities has increased as a result of refinance and purchase activity that was triggered by lower rates.

Why is that important?

As the Fed now has fewer funds to last through the remaining months of the program, its ability to keep rates low will wane.
As the Fed's program winds down and ends, we’ll likely see two things happen.

First, we will probably see higher levels of volatility—with rates sometimes shifting dramatically in the middle of the day. That means it is more important than ever for buyers to work with a knowledgeable mortgage professional who has a finger on the pulse of the market at all times and can provide trusted, proven advice.

Second, since MBS will have less support from the Fed, rates are likely to rise over time.

In short, while rates are still very good, they may not be for long.

What should you do to protect yourself?

First and foremost, work with a knowledgeable mortgage originator who studies and monitors the market.

Second, don’t be fooled by media stories that only report the headlines and don’t understand the underlying implications of the Fed’s actions. If you ever hear something in the news but aren’t sure what it means to your situation, feel free to call or email me for in-depth answers and advice.

Finally, if you haven't yet explored how the current rate environment might benefit you or someone you know, let’s arrange a time to sit down and discuss your unique situation as well as your short- and long-term goals. Remember, rates are still very good, but they may not be for long.

Existing home sales were reported today at 6.54M units, a bit higher than estimates of 6.25M. Additionally, the inventory of unsold homes fell to a 6.5 month supply, down sharply from last month's 7 month level, and quite a bit lower than June's 9.4 months reading.

This positive news is fueling a selloff of Mortgage Backed Securities, which causes mortgage rates to rise.

And while this is a good report, but it is being somewhat fueled by the Homebuyer Tax Credit, as 51% of sales were from First Time Home Buyers.

On the inventory front, while the numbers is a nice improvement, we must remember that the inventory is measured by the amount of homes available for sale against the present pace of sales. If the pace of home buying slows once the temporary Home Buyer Tax Credit goes away, we could see inventories start to creep higher again.

Also remember that the Federal Reserve is winding down its purchase program of Mortgage Backed Securities. As this largest buyer is removed from the marketplace, there will be no one left to support the current level of pricing. And when MBS prices fall, mortgage interest rates move up.

Overall, the economy is headed in the right direction, with most of the technicals tracking a "traditional" recovery. Yes, unemployment is still high, but new jobs are the last thing to be added in a recovery. 2010 may not be a barn-burner, but all the trends show it should be a reasonably stable growth year.

Last week FHA tightened her belts on streamline refinances. Over this coming weekend (December 12, 2009), Fannie Mae’s automated underwriting engine (called Desktop Underwriter) will be upgraded to version 8.0. DU 8.0 will require:

• Minimum credit score of 620 for Fannie Mae, FHA, USDA and VA loans. (except for DU Refi Plus)
• Maximum debt to income ratios of 45% (some wiggle room for strong borrowers)

Of particular interest is the change for borrowers with a foreclosure that is between 5-7 years old:

• 10% down payment
• Minimum 680 score
• Primary residence only (no 2nd homes or investor properties)
• No cash-out refinances allowed

So, despite the university law professor in Arizona who states it's better to dump your house now, take the credit hit and be ready to buy again in 3 years, these guidelines make it clear that you would have to wait at least 5 years before you could even consider buying a house again, and possibly 7 years if you don't have the required 10% down payment.

Other changes include:

• Increased down payments for 2-unit properties
• Files that are determined to be Level 2 or Level 3 (higher risk) will no longer be approved, except for DU Refi Plus.
• Borrowers with a Deed-in-Lieu of Foreclosure that is between 4-7 years old will need a 10% down payment
• Tighter timing for approvals when a bankruptcy is on your credit report
• One-Time-Close construction loans must go through underwriting again at modification if the credit documents are more than 4 months old and the loan-to-value ratio exceeds 70%
• Verbal verification of employment required within 10 days of the note date for all borrowers (30 days for self-employed borrowers)
• 2 months of reserves for second homes
• 6 months of reserves for investment properties
• Bi-weekly mortgage products are eliminated

I'm sure we'll continue to see even more tightening of the guidelines into the future, so acting now on your purchase or refinance could be to your benefit. Contact me if you have any questions about these changes or how you might qualify.