FHA Extends Temporary Condo Variances

January 31, 2011 by · Leave a Comment 

Good news to report as last week FHA announced the extension of the following 2 condo variances through June 30, 2011:

 1. FHA concentration is temporarily allowed to a maximum of 50%.  This means that up to only 50% of the units in a given complex will be able to have FHA financing.  This limit will drop to no more than 30% on July 1.

 2. Pre-sale requirements for new construction are temporarily reduced to a minimum of 30% before rising to 50% on July 1 (not that there is a whole lot of condo construction going on around anyway, but its nice to know that the FHA is looking out for us!).

 A quick reminder that to obtain an FHA condo approval:

  • At least 50% of the units must be owner-occupied
  • At least 10% of the budget must be set aside for reserves and capital expenditures
  • The HOA is required to maintain comprehensive general liability insurance covering all of the common elements, commercial space owned and leased by the owner’s association, and public ways of the condominium project

Housing Sector Looking Better

January 31, 2011 by · Leave a Comment 

The Housing Sector continues to show signs of life with encouraging data released last week. December New Home Sales jumped 18% to the highest level in eight months. The inventory of new homes on the market fell to only a 6.9-month supply. December Pending Home Sales, a leading indicator of housing market performance, rose 2% from November, the fifth increase in the last six months. According to the National Association of Realtors (NAR), “modest gains” in the labor market have helped buyers during a period of favorable home affordability levels. Expect even better numbers as we roll into the early stages of Spring!


Last week’s Fed meeting yielded no major surprises and most of the data released last week was encouraging. The most significant economic data showed a 3.25% increase in 4th Quarter GDP, up from a level of 2.6% in the 3rd quarter. For all of 2010, the economy grew 2.9%, which is the highest level since 2005. Things seem to be heading in the right direction! Notably, government spending actually declined during the 4th quarter, while consumer spending picked up significantly. Government stimulus programs have boosted the economy during the past few years, but in the long-term it will be the performance of the private sector that will largely determine the strength of the economy. Economists expect consumer spending and business investment to gain momentum this year and the consensus forecast for 2011 is for GDP to grow at a 3.2% clip, which would be consistent with a gradual decline in the unemployment rate.



In addition to the GDP figures last week, here are a few things of note:

  • Consumer Confidence
  • The Fed made no change to the Fed Funds rate
  • The Dow stock index crossed above 12,000 for the first time since June 2008
  • rose to the highest level since May



Minimizing the Credit Card Balance Ratio to Maximize Your Credit Score

January 24, 2011 by · Leave a Comment 

Most people today understand the importance of having a good credit score, however, few understand how much credit card balances and limits affect their score.  The credit scoring model places a lot of emphasis on the ratio of a credit card’s balance to it’s limit.  The lower this ratio the better and the optimal ratio is less than 30%.  A high ratio lowers a score and, if combined with other maxed out credit cards, can do so significantly.  To maximize your credit score, increase the limit on your cards as high as possible and then decrease your balances to no more than 30% of the limit.  Use additional credit cards if you need to, but keep your credit card balance ratio as low as possible.  If you would like to know your credit scores, just let me know as I would be happy to pull your credit report for you.

Economy Continues to Pick up Steam

January 24, 2011 by · Leave a Comment 

Housing sector statistics continue to strengthen. December Existing Home Sales rose 12% from November to an annual rate of 5.28 million units. The inventory of unsold existing homes declined 4% to an 8.1-month supply. First-time buyers purchased 33% of existing home sales. December Housing Starts fell 4% from November, but December Building Permits, a leading indicator, rose 17% to the highest level since March. The performance of the housing market varied in different regions, but to see improvement on the national level is encouraging.

The housing data combined with a few other stronger than expected economic reports that hinted at higher inflation contributed to rates trending slightly higher last week. The Philly Fed manufacturing report indicated a sharp increase in inflation. Investors have also become worried about a decline in demand for US bonds from China. The Treasury reported that China was a net seller of Treasury securities in November. As the largest foreign holder of US fixed-income securities, any sustained drop in demand from China would have a large impact on the US bond markets, including mortgage-backed securities (MBS) markets. Higher rates would be the inevitable outcome.

Reflecting back, there has been plenty of good economic news rolling in over the last few months. Good economic news is a double-edged sword though, as it can lead to higher mortgage rates. This is at least once instance where good news is bad news. But why exactly does this happen? The main reason is that whenever the economy is improving, investors are willing to take more risks seeking larger returns and put more money into the stock market. To do this, they move money out of the less-risky bond market, which causes bond prices to go down and bond yields to go up. Mortgage rates are directly tied to bond yields, so when bond yields go up, so do mortgage rates (and vice versa). Mortgage rates have been on the rise and as more positive economic news rolls in, expect them to go even higher.

PMI Tax Deductibility Extended Through 2011

January 18, 2011 by · 1 Comment 

Congress has once again extended legislation that makes mortgage insurance (MI) tax deductible for many Americans. The new legislation ensures the tax deductibility of MI on purchase and refinance loans for qualified borrowers through the end of 2011. The legislation itself is no different than what was originally passed in 2007. The MI premiums are still fully deductible for taxpayers earning up to $100,000, and partially deductible for those with incomes between $100,000 and $109,000.


Extending MI tax deductibility is an important win for many reasons including:

  • Tax relief is much needed in a time of struggling economic recovery, and continues to help protect the dream of homeownership for many.
  • MI is not only safe and predictable, but it’s also cancelable once the loan amount drops to 78% of the original sales price OR 20% equity can be proven through an appraisal after two years history of timely payments



Low Inflation and Strong Demand

January 18, 2011 by · Leave a Comment 

Positive news to report from last week on two of the most important influences on mortgage rates. First of all, inflation continues to be benign. Inflation is always negative for mortgage rates but recently, despite improving economic growth, there have been few signs of rising inflation. The Consumer Price Index (CPI) is the most closely watched inflation indicator and December’s report shows that it is only up 1.5% higher than one year ago. In addition, Core CPI, which excludes the volatile food and energy components, increased an even lower 0.8% from one year ago. While food and energy prices recently have been rising more rapidly than the overall price level, investors generally focus on core inflation. The Fed considers a range for core inflation between 1.5% and 2.0% to be most desirable for the long-term.

A second important influence for mortgage rates is the level of investor demand for bonds. If demand falls, then yields must rise to attract additional investors. A good indicator of investor demand for bonds comes from the Treasury auctions. During last week, demand was stronger than average from both domestic and foreign investors for longer-term 10-year and 30-year Treasury securities. Since mortgage-backed securities (MBS) and longer-term Treasury securities are similar investments, mortgage rates generally benefit from strong Treasury auctions, as was seen last week.




5 Year ARM – A Hot Alternative!

January 11, 2011 by · Leave a Comment 

As we all endure this week’s wintery weathery mix, it seems appropriate to mention a sizzling hot mortgage alternative.  Fixed mortgage rates have pushed up over the last few months creating an unusually large gap between the 30 year fixed rate and the 5 Year Adjustable Rate Mortgage (ARM) rate.

A 5 Year ARM is a unique hybrid program which combines the best features of both the adjustable and fixed rate products.  It delivers a very low interest rate and, therefore, a lower monthly payment typical of ARM’s.  However, it also gives home buyers the stability and predictability of fixed payments that will not increase in the near future as the rate is fixed for the first five years and then can change annually.

As the 30 year fixed rate has surged from 4% to 4.75% over the last few months, the 5 year ARM rate has stayed remarkably low creating an unusually large gap and one heck of an opportunity for certain home buyers.  Contrast this week’s Conforming 30 year fixed rate of 4.75% with only a 3.625% Conforming 5 Year ARM rate.  This 1.125% savings amounts to a monthly payment savings of $131.19 on a $200,000 loan!

We are excited to offer 5 Year ARM’s on both FHA and Jumbo products as well and the savings are equally impressive!  On a $175,000 FHA loan, the 5 Year ARM generates a savings of $102 per month!  On a $500,000 Jumbo loan, the 5 Year ARM generates a savings of $379 per month! 

In addition, the borrower is able to qualify for the loan at the lower note rate and payment!  This can be instrumental in getting a tight loan through!

With the potential of the rate varying after five years, the 5 Year ARM product does have interest rate risk.  However, there are limits on how much the rate can increase each year and an overall cap which limits the most the rate can ever increase.  The annual cap is 1% for the FHA product and 2% for the Conforming/Jumbo option.  After five years the rate is determined each year by adding a margin of 2.25% to the One Year LIBOR Index.  The most the rate can ever increase is 5% over the initial rate.

Although not for everybody, for the right borrower a 5 Year ARM can be a prudent choice.  For anyone planning to move over the next five years, the 5 Year ARM would be the way to go and lead to significant savings.  In our Conforming example above, the $131 monthly savings adds up to $7871 over five years!  Obviously, the rate never even has an opportunity to adjust if the home is sold within five years.  Another good time to use the 5 Year ARM is for a buyer anticipating a salary increase.  This buyer can enjoy the low payment for the first five years and then be able to afford the larger payment later.  It is also a good alternative for someone looking to pay their loan balance down significantly over the first five years because after the fifth year, the loan is recast each year based on the new interest rate and loan balance.  Thus, if the balance has been paid down significantly, the new mortgage payment will also be significantly lower (even if the rate has risen).  Finally, as already mentioned, the 5 Year ARM can be an excellent tool to help reduce a buyer’s debt ratio and enable them to qualify for a larger loan amount and sales price.  There are certainly some good examples of where the 5 Year ARM has saved the day!

With such a wide rate gap, the 5 Year ARM simply can’t be ignored in the present market.  The time has come to understand how it works and to consider it at the appropriate time!

Fannie Mae Guideline Change Not As Super As It Seems

January 11, 2011 by · Leave a Comment 

Fannie Mae recently issued a guideline change that sure seemed like fantastic news for the real estate industry.  In the past on a Conventional loan, if the borrower received a gift, the borrower still had to come up with at least 5% from their own funds unless the borrower put 20% or more down.  Fannie Mae declared that moving forward, all funds on a Conventional loan can come from a gift even if the borrower puts less than 20% down!  What seemed like super news is not so super though as the Private Mortgage Insurance (PMI) companies are not honoring this change at this time making the change, well, worthless.  A head underwriter with a leading PMI firm confirmed last week that none of the PMI companies have changed their guidelines thus far.  Hopefully, at least one of the PMI companies will choose to adopt this guideline change in the near future.  Until that happens though, FHA remains the loan of choice for a borrower receiving a gift for down payment who does not have at least 5% from his/her own savings.  Although this is not as great of news as it first seemed, what should not be missed is that THE major player in the mortgage industry (Fannie Mae) just came out with a significantly more lenient guideline and that in and of itself is good news and a step in the right direction!

Strong Economic Growth Continues / Unemployment Rate Drops Sharply

January 11, 2011 by · Leave a Comment 

The trend toward stronger economic growth continued last week as nearly every economic report released showed greater than expected improvement from the previous month. These reports covered a broad representation of the economy and included the Services, Manufacturing, and Construction industries. This stronger economic growth is certainly good news for job creation and home sales, but it is also inflationary and is what has led to recent higher mortgage rates. In fact, mortgage rates would have really surged last week if it was not for a weaker Employment report than was forecast. Estimates called for as many as 300K new jobs, but Friday’s data showed that the economy added only 103K jobs in December with revisions to prior months adding an additional 70K jobs. The combined total of 173K new jobs is great news but mortgage rates dropped when this figure came in much less than the forecasts. The best part of the report was the Unemployment Rate, which dropped from 9.8% to 9.4% in November. This was far below the consensus forecast of 9.7% and the lowest level in 19 months! Economists suggest that seasonal factors played a role in the large decline and next month’s results will be highly anticipated.

Recent Fannie Mae Underwriting Changes

January 7, 2011 by · Leave a Comment 

Fannie Mae has rolled out its latest underwriting changes, effective December 11th. Most of the changes are fairly minor but, surprisingly, a few are more lenient including the first two listed below. Here is a summary of a few of the changes worth noting:





In the past on a Conventional loan, if the borrower received a gift, the borrower still had to come up with at least 5% from their own funds unless the borrower put 20% or more down. Moving forward, all funds can come from a gift even if the borrower puts less than 20% down! This is an amazing development that will help more people get Conventional financing. Gifts are not allowed on investment property purchases, so this rule does not apply on this property type.

Pay Stubs.

Foreclosures. In the past when obtaining a new mortgage, the waiting period that must elapse after a borrower experiences a foreclosure is seven years. However, Fannie Mae allowed a shorter time period – five years – if certain additional requirements were met (e.g., minimum down payment, credit score, and occupancy requirements). These requirements have now been modified to remove the five year option. Moving forward, all borrowers will now be required to meet a seven-year waiting period after a prior foreclosure before being eligible to obtain a new mortgage.



Self-Employed Borrowers.



These are just a few of the changes in the most recent Fannie Mae manual update, but the most significant worth noting.  Fortunately, there is some good news mixed in with this round of changes.  Lets hope this is a trend that continues….


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