Good News for California if the Proposed Change to the Conforming Loan Limit Passes

Fannie Mae (FNMA) and Freddie Mac (FHLMC) create a
loan limit for loans that they will purchase. It is currently
at $417,000 for a single-family home. This limit is reviewed
annually and is primarily determined by whether prices of
homes have gone up or down during the year.

In light of the disruption in the mortgage market, lawmakers
are looking for ways to stimulate activity and provide
liquidity for lenders.

The proposal is to increase the conforming loan limit to
$625,000 on a single-family home in California. Those of
us in the mortgage profession have often wondered why
Hawaii and Alaska were classified as "high-cost" with
higher conforming loan limits, and California was not.

This may finally be a recognition that California borrowers
need the kind of support that the other high-cost areas
have provided.

If this goes through, there are at least a couple of
significant benefits to homeowners and new home
purchasers.

For those who have an existing loan that is between
$417,000 and $625,000, there may be an opportunity to
refinance their loans. Because their loan originally was
created as a "jumbo" loan (above the $417,000 conforming
limit), they probably paid a higher rate in that market.

With rates dropping and their loan balance now fitting within
the favorable conforming loan limits, a lower interest rate
may be available for these borrowers. Or, it may present
an opportunity for borrowers to disengage from a loan
that had a low initial rate and that would be scheduled for
a recasting of the interest rate and, most likely, higher
payments.

Another reason that it may benefit new home purchasers
is because it would now create liquidity in the mortgage
market that had evaporated over the last seven months or so.

Investors that had purchased mortgage-backed securities (MBS)
that were comprised of jumbo loans had seen a drop off in the
timely payments and performance of those investments. As
a result, they elected to make investments in other vehicles,
since they no longer had confidence that the quality of these
MBS was as high as they were led to believe.

When investors won't purchase loans, lenders are limited as to
how much money they have to lend. This generates a slowdown
and a logjam with lenders now having to keep loans in their own
lending portfolio instead of moving them through a fluid system.

If FNMA and FHLMC increase their loan limits, there now would
be a mortgage conduit that is more broadly accepted because
there is an element of government backing to these two corpor-
ations. This would revitalize the mortgage market, and by
extension the housing market. It would create the ability for
lower-valued homes to be marketed and allow those homeowners
to move up. This would benefit the entire real estate market.

Let's hope that Congress will be able to get this proposal through,
do it quickly and have an immediate effective date. The stimulus
that this would provide can help offset the effects of the "mortgage
crisis" that has affected the economy to such a large degree.

Lenders Are Getting Innovative - A Couple Of New Programs

As a mortgage broker, we are able to get approved with many
different lenders to represent their product lines to our clients.

With few exceptions, we can place loans with all the major
lenders that have an "office on the corner". Wells Fargo,
Chase, Citimortgage, Washington Mutual and Countrywide
are among those large companies.

There are also many lenders that do not have a retail
presence with origination offices locally and create loans
via the broker network. They make their lending programs
available to us, we do the work to process the loan paper-
work and upon their approval, the fund the loan to allow
for the closing.

When you apply with one of the large lenders directly,
you will be faced with the fact that you are limited to the
loan programs that they offer. In their effort to gain your
business, you will need to adapt to their product line,
whether that is the best loan program for you or not.
They represent their LOAN PROGRAMS to you.

We, as brokers, on the other hand, have access to all of
their programs as well as the specialized programs that
other lenders and mortgage companies develop to meet
their clients needs.

I work to understand your goals, your needs, your risk
tolerance, your time horizons and find the best match of
mortgage product from all the lenders that we represent.
We represent YOU to the marketplace.

Here are a couple of new programs designed to provide
benefit to segments of the borrowing public:

A. A 40-year loan that allows for interest only payments
for the first 15 years.

This is a fixed interest rate loan for the first 15 years. At
that point it adjusts and then is amortized over the next
25 years.

This loan is perfect for the borrower that wants long-term
stability with the interest rate that they are paying, but
also wants the flexibility of paying a minimum payment
of just the interest each month.

There have been so many loan programs that only offered
interest only payments with the interest rates being fixed
for the first 3, 5, 7 or 10 years. If you have been following
some of the difficulties that borrowers have been experiencing
lately, you know that a number of those borrowers are facing
new payment terms once they are reaching the end of the
3 or 5 year introductory periods.

This new loan eliminates the possibility of that short-term
payment shock and works well for borrowers that may want
to work toward owning their home free and clear some day.

B. A first trust deed line of credit that is designed for
borrowers that are big income earners, and who spend less
than they earn.

The concept behind this loan is to allow the borrower to
use their income more effectively in reducing their mortgage
and to have compounding work in their favor.

Let me go through an example to illustrate how it works.

Let's say the borrower obtains a $500,000 loan to purchase
their home. They bring home $10,000 per month and have
routine expenses of $7,000 per month including their
mortgage payment of $3,500, let's say.

Traditionally, they would deposit their checks into their
checking account. They would pay their mortgage payment
of $3,500 and through the remainder of the month pay the
other bills of an additional $3,500. They would have $3,000
remaining to put into savings, investments, or to pay down
on their mortgage loan.

With this new mortgage plan, the $500,000 loan would be a
line of credit. At the beginning of the month, they would
deposit the entire $10,000 against the line of credit, paying
the interest due and all of the remainder would be applied
to the principal. Through the course of the month, they
would use the ATM privilege, the online banking feature, or
the checks supplied for the line of credit to pay their bills.

By paying everything against the line of credit at the
beginning of the month, they are reducing the principal
balance so that the interest accrues on the smaller amount.
Where they would normally be leaving $6,500 in their
checking account, earning zero or little interest, to pay
their bills, now they are drawing the amounts that they need
just when they need it.

That $6,500 is "earning" interest by the fact that it is not
accruing an interest debt during that time. The combination
of reducing the principal balance significantly and only having
their interest debt accrue for a limited amount of time works
heavily in the borrower's favor over the term of the loan.

This plan allows for savings of tens of thousands of dollars in
interest charges over the life of the loan.

It requires the borrower to think in terms of actual savings and
sound financial planning principles. Too many borrowers are
so focused on the interest rate that they fail to consider alter-
natives that could provide them substantial benefits with these
kind of creative solutions.


Please remember that I have access to many distinctive loan
programs that are not available to the large lenders, but are
valuable resources to meet your needs.

As always, please get in touch with me to discuss the unique
qualities of your situation so we can arrive at a suitable solution
for you.

Recent Changes in the Mortgage Industry-Some Things You Should Know

As the shake-out continued through the end of 2007,
more changes are rippling through the mortgage business
that will affect costs of getting a mortgage, availability
of programs, and qualifying standards.

**Recently, Fannie Mae (FNMA) and Freddie Mac
(FHLMC) announced that they were imposing a new fee
that would add .25% in costs to each loan that they
purchased from lenders. This was a one-time fee at
closing, not an increase to the interest rate.

FNMA and FHLMC purchase loans up to $417,000,
commonly called the conforming limit because those
loans are designed to conform to the lending guidelines
of those two agencies.

As you might expect, the .25% fee increase will be
passed through from the lenders to the quotes that
borrowers receive for the creation of their new loans,
and the cost will ultimately be borne by the consumer.

The fee increase was imposed as a way for FNMA and
FHLMC to recover some losses that they have incurred
through the bad performance of loans in their portfolios.

**A major player in the creation of stated income loans,
Washington Mutual, recently sent out an underwriting
update stating that they were imposing new guidelines
for the creation of those loans.

Specifically, they are requiring a credit score of at least
720, and they are limiting the maximum loan to be no
higher than 50% of the value of the property.

Not all lenders have adopted this same policy, but it
gives us an indication as to how far these loans have
fallen from favor.

When the pendulum had swung so far to the side of
liberal underwriting, stated income loans were available
all the way up to 100% of the property value. There is
a higher risk to the lender when they trust the borrower
to fairly represent their income instead of asking for
proof. But the interest rates and fees were supposed
to reflect their being compensated for the higher risk.

Beyond the fact that the lenders were creating these
loans is the reality that there was a huge appetite in
the capital markets to purchase these loans. There
was a lot of excess liquidity in the marketplace, those
funds were seeking what was thought to be safe
investments with good rates of return, and that is
what fueled what came to be the mortgage crisis.

The standards that served the mortgage business and
the borrowers well for many years was allowed to
erode and the investors and lenders did not choose
to adhere to the old standards because the money
needed to get out to go to work.

But with the new announcement we can see that the
investor appetite has dried up and the lenders are
all pulling back to various degrees to minimize the
risk.

**Second loans and lines of credit became very popular
over the last few years. Instead of borrowers getting
one loan which may have required private mortgage
insurance (PMI), it was less expensive for the borrower
to couple a first and second loan to meet their goals.

Home equity lines of credit (HELOCs) were heavily
promoted by many lenders to induce borrowers to
tap into the equity of their homes and free it up to
spend.

It was not uncommon for any lender offering second
loans and HELOCs to place their loan behind almost
any other lender's first loan. They based their
decision on the value of the property, they type of
loan that there loan would go behind, and the credit-
worthiness of the borrower.

As we discussed above, where these loans were
originally offered with prudent lending standards, over
time the standards were liberalized and the lenders
were accepting bigger risks.

The second loans were the most vulnerable in the
whole scheme of things, because that loan was the
one that was extending credit closest to the value
of the property. If property values declined (which
they did), or if borrowers could not make the payments
(which some could not), the second loan was getting
squeezed in the transaction and would suffer losses
before the first loan would.

The recent changes that many lenders have announced
is that many have pulled out of the second loan market,
and the ones that remain only want to create their
second loan behind their own first loan. To a large degree,
no more of getting a second loan from lender A when the
first loan is with lender B.

There are exceptions, but they are becoming fewer.

Just another sign that the lenders and investors have
pulled back from their more extreme positions and have
probably over-reacted while they try to determine what
defines acceptable risk in this new market.

As always, get in touch with me to talk over your situation.
If you need a stated income loan or a new second loan,
we still have choices - they are just not as plentiful or as
liberal as they once were.