Ever since the mortgage meltdown, there has been a
trend to go back to the traditional mortgage products
that served the marketplace well for many years.
Loan products that included stated income, negative
amortization, and high-leverage vehicles that asked
the borrower to put little down payment have been
eliminated.
To a large degree, the products that are currently
offered include 30-year and 15-year fixed rate loans
and FHA and VA loans. This is the "vanilla" in the
mortgage world: stable, predictable, no surprises,
nothing exotic.
These are the loans that readily marketable among
lenders and investors. When these loans are packaged
properly and their risk ratings are accurate, they
are sold to FNMA and FHLMC and pooled into mortgage-
backed securities that investors can buy into.
There are some alternatives that lenders are still
offering to the standard menu. These lenders are
often classified as portfolio lenders, because they
tend to keep the new loans in their portfolio instead
of selling them to FNMA and FHLMC or in a mortgage-
backed security.
* There are still adjustable rate loans where
the initial interest rate is fixed for the first
3, 5, 7 or 10 years of the 30-year loan term. These
loans tend to offer lower interest rates in the
beginning, and then provide the lender an opportunity
to adjust the rate to something competitive in the
marketplace at time of adjustment.
The interest rate adjustment is determined by a formula
that includes a market-based index, e.g. LIBOR, Treasury
Bills, or a Cost of Funds index, plus a margin that is
set in your loan contract.
The best use of these loans is to match up the time you
expect to be in the home with the length of time that
the interest rate is fixed. For example, if you had a
5 year time frame in mind to own the home, than a couple
of suitable suggestions would be to look at the 5-year
and 7-year products. It would not make sense to select
the loan where the interest rate adjusts after 3 years
because you may be facing a substantially higher interest
rate at time of adjustment.
* Interest-only payment loans are still available,
but with a twist. No longer will the lenders allow
just the interest to be paid in the first few years of
the loan and then put the borrower into a higher payment
at that point.
The most innovative use of the interest-only payment
loans is one where the term of the loan is 40 years,
the interest-only payment and rate is in effect for
the first 15 years, and then there is an adjustment
to the rate, and the payments are amortized over the
remaining 25 years.
This allows the borrower to do some significant long-
term planning, and reduces the risk to both borrower
and lender with regard to "payment shock" when the
interest only feature no longer continues. Many
borrowers that initiated interest-only payment loans
in 2002-2005 faced hardship when the loans moved
into fully amortized payments.
* There is a loan product that has significant
advantages for borrowers who have healthy cash flow
each month, and who do not spend more than they make.
This loan is a line of credit that is tied to a
checking account and debit card. The idea behind it
is to merge your home loan and banking into a fluid
system that allows you to save on the interest accrual
each month.
Let's take a look at an example: Borrower has a need
for a $500,000 loan on their home. They make $20,000
per month, and have expenses of $12,000. They opt for
this line of credit loan.
In the first month, they deposit their entire check
against the line of credit, dropping the balance to
$480,000. Since interest is calculated daily and
accumulated for posting at the end of 30 days, you
can already see that for that one day, there is a
benefit to the borrower of having interest accrue
on $480,000 instead of $500,000.
During the course of the month, bills and living
expenses need to be paid. The balance will grow
from $480,000 to $492,000. But, the benefit still
is significant. With a traditional loan, the
borrower has 30 days interest accruing on $500,000.
On this loan, interest is accruing based on balances
ranging from $480,000 to $492,000.
Each succeeding month works in a similar fashion,
and the money that the borrower used to have sitting
in a checking or savings account is now working for
them by reducing the amount of interest that is owed
on their home mortgage.
If there ever was a need to cover some bigger expenses
in a given month, the unused portion of the line of
credit is available to be drawn upon. In this example,
you could take the balance up to $500,000 again.
Not all of these products are suitable for every
borrower. There are many instances where the "vanilla"
product is the right one, but for more sophisticated
borrowers, or who have a special need, it's good to
know that there are lenders willing to serve that
market.
I am here to help you get the most suitable loan product
that you can qualify for. Please be sure to get in
touch with me so I can put my resources to work for you.
Wednesday, October 21, 2009
Wednesday, October 7, 2009
The State of Jumbo Lending
After the mortgage meltdown, the availability of jumbo
loans has been vastly diminished.
Jumbo loans have traditionally been defined as those
above the FNMA/FHLMC conforming limit of $417,000.
In 2008 and 2009, Congress has allowed for FNMA and
FHLMC to purchase what are defined as "high-balance
conforming loans". The maximum loan amount varies
from county to county, and currently in San Diego
the limit is $697,500 for a single-family home.
Before Congress created this category, loans above
the $417,000 limit were usually funded through lenders
who packaged them into mortgage-backed securities (MBS).
Investors on Wall Street would buy into these pooled
mortgages so that they could obtain a higher rate of
return than Treasury bills, as an example.
One of the biggest problems with the MBS pools was that
investors were told that they were investing in pools of
loans that were underwritten to a high standard. When
the mortgage market began to unravel, the investors
realized that they had actually purchased into pools
that contained lesser quality loans that went into
default at an alarming pace.
Based on that experience, investors through Wall Street
have abandoned their interest in buying into newly
created MBS pools. They suffered losses because they
discovered too late that they could not trust the ratings
that were provided to them as an inducement to purchase
into the MBS pool.
We have had a three-tier lending system in place through
2009:
1. Conforming loans - those sold to FNMA and FHLMC with
a maximum loan limit of $417,000 for a single-family
home.
2. High-balance conforming loans - eligible to be sold to
FNMA and FHLMC up to a maximum of $697,500 for
a single-family home in San Diego.
Currently, Congress has authorized this only through
the end of 2009. If it is to continue into 2010, they
will need to enact legislation for that to happen.
As a reminder, Congress failed to continue it at the
end of 2008, re-enacted it in early 2009, and by the
time we were given the guidelines and authorization
to create these loans again, we had lost about 4-5
months to that process.
3. Jumbo loans - for the most part, those loans above
$697,500. These loans are either created for the
lender's own portfolio, or are sold on the secondary
mortgage market, which is not as active as it once was.
So, where are we headed going into 2010?
First, if you have need for a loan between $417,000 and
$697,500 (in San Diego), you would be wise to push toward
getting it closed in 2009. As of this writing, there is
no guarantee that that category will continue into 2010.
I would find it hard to believe that the government would
let the housing industry flounder while they are still
seeking an economic recovery, but we are talking about
the government here.
Second, recognize that there are fewer lenders than there
was a few years ago. This means that they can dictate
the terms of what will be offered to the public (with
encouragement by the federal regulators). They are
extremely risk-averse right now, and may continue on
this path for the foreseeable future.
The reality is that more than half the mortgages being
made in the US are made by Wells Fargo, JP Morgan/Chase
and Bank of America. Most of these loans are in the
conforming and high-balance conforming categories.
The US government (read: taxpayers) is standing behind
about 85% of the new loans being created in the last
couple of years.
Third, there is a real possibility that we may have
only a two-tier system in 2010. The conforming loans
should continue as we have known them. The high-balance
conforming loans may become a thing of the past. And
the second tier of jumbo loans (which would then be
defined as those above $417,000), would enjoy limited
availability, strict underwriting, and pricing models
that ensure profit to the lenders.
It is never too early to start planning. If you anti-
cipate a need for a loan above $417,000 going into
2010, please contact me and we can strategize about how
to meet your goals.
loans has been vastly diminished.
Jumbo loans have traditionally been defined as those
above the FNMA/FHLMC conforming limit of $417,000.
In 2008 and 2009, Congress has allowed for FNMA and
FHLMC to purchase what are defined as "high-balance
conforming loans". The maximum loan amount varies
from county to county, and currently in San Diego
the limit is $697,500 for a single-family home.
Before Congress created this category, loans above
the $417,000 limit were usually funded through lenders
who packaged them into mortgage-backed securities (MBS).
Investors on Wall Street would buy into these pooled
mortgages so that they could obtain a higher rate of
return than Treasury bills, as an example.
One of the biggest problems with the MBS pools was that
investors were told that they were investing in pools of
loans that were underwritten to a high standard. When
the mortgage market began to unravel, the investors
realized that they had actually purchased into pools
that contained lesser quality loans that went into
default at an alarming pace.
Based on that experience, investors through Wall Street
have abandoned their interest in buying into newly
created MBS pools. They suffered losses because they
discovered too late that they could not trust the ratings
that were provided to them as an inducement to purchase
into the MBS pool.
We have had a three-tier lending system in place through
2009:
1. Conforming loans - those sold to FNMA and FHLMC with
a maximum loan limit of $417,000 for a single-family
home.
2. High-balance conforming loans - eligible to be sold to
FNMA and FHLMC up to a maximum of $697,500 for
a single-family home in San Diego.
Currently, Congress has authorized this only through
the end of 2009. If it is to continue into 2010, they
will need to enact legislation for that to happen.
As a reminder, Congress failed to continue it at the
end of 2008, re-enacted it in early 2009, and by the
time we were given the guidelines and authorization
to create these loans again, we had lost about 4-5
months to that process.
3. Jumbo loans - for the most part, those loans above
$697,500. These loans are either created for the
lender's own portfolio, or are sold on the secondary
mortgage market, which is not as active as it once was.
So, where are we headed going into 2010?
First, if you have need for a loan between $417,000 and
$697,500 (in San Diego), you would be wise to push toward
getting it closed in 2009. As of this writing, there is
no guarantee that that category will continue into 2010.
I would find it hard to believe that the government would
let the housing industry flounder while they are still
seeking an economic recovery, but we are talking about
the government here.
Second, recognize that there are fewer lenders than there
was a few years ago. This means that they can dictate
the terms of what will be offered to the public (with
encouragement by the federal regulators). They are
extremely risk-averse right now, and may continue on
this path for the foreseeable future.
The reality is that more than half the mortgages being
made in the US are made by Wells Fargo, JP Morgan/Chase
and Bank of America. Most of these loans are in the
conforming and high-balance conforming categories.
The US government (read: taxpayers) is standing behind
about 85% of the new loans being created in the last
couple of years.
Third, there is a real possibility that we may have
only a two-tier system in 2010. The conforming loans
should continue as we have known them. The high-balance
conforming loans may become a thing of the past. And
the second tier of jumbo loans (which would then be
defined as those above $417,000), would enjoy limited
availability, strict underwriting, and pricing models
that ensure profit to the lenders.
It is never too early to start planning. If you anti-
cipate a need for a loan above $417,000 going into
2010, please contact me and we can strategize about how
to meet your goals.
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