Update To The FNMA Higher Limit Conforming Loans

The initial program guidelines have been published for the
new "Conforming Jumbo" loans that FNMA will purchase above
the traditional $417,000 conforming limit and the new,
temporary San Diego limit of $697,500.

Here is a summary of some of the program parameters:

*Maximum Loan Amount: $729,750. San Diego's is $697,500.

*Loan Programs will include 15-year and 30-year fixed rate
loans and 5/1 ARMs (30-year loans fixed for the first five
years). The 5/1 ARMs will allow for interest-only payments
in the first 10 years.

*These loans must be originated by 12/31/2008 under the
current regulation. There is always a chance that Congress
may extend the time period, but there are no proposals to do
so at this time.

*Purchase loans can go as high as 90% Loan-to-Value (LTV) on
a primary residence. Up to 80% LTV requires a credit score
of 660 or higher, between 80%-90% requires a credit score of
700 or higher.

*Purchase loans on second homes or investor properties can be
included up to a 60% LTV maximum with a 660 or higher credit
score.

*Refinances can go to 75% LTV with a credit score of 660 or
higher on primary residences. They will not allow cash-out to
the borrower. Also, consolidation of any second loans into
the new first loan is not allowed. We would have to have the
existing second lender agree to subordinate their loan to
a second position behind the new loan, meaning that the
borrower will have a new first loan and the same second loan
after the refinance.

*Borrowers cannot have any late payments on their existing
mortgage in the last 12 months.

*All loan packages must be full documentation providing proof
of sufficient income and assets to qualify. "Stated income"loans
are not available.

*Property types can include single-family homes, planned unit
development units and condominium units that meet condo
guidelines.

When the announcement was made that FNMA was expanding their
loan purchase amounts as part of the Stimulus Package, we
were all hoping that many of the loans between $417,000 and
$697,500 would be able to improve their situation with tradtional
conforming interest rates and fees.

We are finding that the rates for these "Conforming Jumbo"loans
are being priced higher than the conforming loans, but
not nearly as high as the jumbo loans have risen.

Before the Subprime Crisis and the lack of performance of the
mortgage pools that investors had purchased, the spread
between conforming loans and jumbo loans was only about
.25% to .50%. In other words, if conforming loans were 5.5%,
jumbos were about 6.0%.

Because the investors have no confidence in the quality of
the mortgages that they are purchasing, the spread now between
conforming and jumbo loans has been about 2.0% to 2.5%.

Based on today's pricing with one of our major lenders, conforming
loans were at 5.625%, conforming jumbos were at
6.5% and jumbo loans were at 8.125%. All of these were with
a loan fee of one point.

We are fully expecting some of these guidelines to change
as the lenders/invetors discover the level of risk that they
are willing to accept. If they get too many requests in a
particular category, we may find that they cut back. If they
find that response is less than expected, they may loosen up
the guidelines to accommodate more borrowers.

If you are one of the borrowers that fall in the new loan
limit category, or if you know of others that need to find
out what they can do, please get in touch with me. It is
important to take a look at every request individually and
to research it in light of the current guidelines (and as
they may change from time to time).

That is the only way to make sure that we are not making
assumptions that may cost you the opportunity to improve
your situation.

The Fed Lowers Rates, But Mortgage Rates Go Up. What's Happening?

Whenever the Fed lowers interest rates, there is always a lot of anticipation, publicity and reaction in the markets.

Most consumers think that the drop by the Fed means that mortgage rates will be lower. There is not a direct cause and effect relationship between these two.

Here are some of the reasons:

The Federal Reserve exerts some control over the interest rate paid by U. S. banks for overnight loans from the Federal Reserve or between banks. These are the Fed Funds rate and the discount rates that get all the press coverage and commentary in the financial news.

The cheaper supply of these funds help banks with liquidity, but it would be very risky for a bank to make a long-term, 30-year mortgage loan that is tied directly to this overnight rate. These rate changes most often will affect the prime rate, and short-term consumer loans and credit cards.

If a bank takes out a short-term loan of $300,000 from the Fed and lends it to a homebuyer for 30 years, the bank still would need to come up with $300,000 to pay the Fed back right away. They could repay by borrowing another $300,000 on a short-term loan, but then it has to continually roll this over. If short-term rates go up, the bank loses money because it has a contract with the borrower for 30 years.

Mortgage lenders that make long-term loans negotiate with the capital markets that include banks, corporations, institutions, pension funds, governments and other investors who buy and sell money. Many times lenders will bundle many mortgages into a package called a Mortgage Backed Security and sell it through Wall Street.

These investors are lending for the long term, so they agree to be paid back in installments which includes an interest rate that is fixed for the life of the loan. As long as the money that the mortgage lender is paying to the investor is lower than the rate it is charging its borrower, the lender will make money.

Long-term lending is based largely on rates paid by the U.S. Treasury when it auctions off new issues. Treasuries are considered very safe - mortgage products would be considered riskier - so the rates on home loans will be higher than the Treasury rates.

In the past, the change in mortgage rates were pegged to changes in the 30-year bond. In recent years, the 10-year bond has been more indicative of investor expectations because a majority of loans get repaid in the first 10 years.

The investors must gauge the risk that they are taking by investing in mortgage products vs. buying the safe Treasury issues. In the past, there was a fairly predictable risk premium over the Treasury values that the investors felt comfortable with.

Recently, because of dropping property values, and the poorer performance on mortgage loans by borrowers, investors have widened the risk premium that they are expecting over the safe Treasury bond yields.

The bond yields are largely influenced by fear (or lack of fear) of inflation. When inflation is forecast, Treasury yields will move higher because investors do not want to buy a Treasury bond today that will will be worth substantially less in the future because inflation has eroded the value of the dollar. When inflation is less of a concern, we see that the Treasury yields go lower and mortgage rates follow that pattern.

So, when the Fed eases interest rates, it has the tendency to make the money supply increase, which will fuel inflation concerns. This money will leave the bond market with its fixed rate of return and go into the stock market where growth, stimulated by the new money supply, is anticipated.

As a result, the Federal Treasury still needs money to operate and will offer new Treasury bonds at higher and higher rates until it attracts the money that it needs.

This dynamic creates the situation that seems so puzzling: the Fed reduces interest rates and mortgage rates go up.

As John Schoen of MSNBC summarized - "...the Fed could cut short-term rates to zero, and it wouldn't cut the cost of long-term mortgage rates".

If you want to monitor the direction that mortgage rates are anticipated to go, you can check the 10-year bond yield periodically. I use http://money.cnn.com/markets/bondcenter/.
It is important that you focus on the direction that the yield is going. Do not focus on the direction that the price is headed, because bond prices and bond yields work in opposite directions.

I'm sure that most of you don't want to become market technicians, but think how people will respond to you at your next cocktail party when you share this information!

Declining Markets - Risk Assessments By Lenders Limit Loans

When property values peaked in 2006, we began to watch
a slow decline in values. This was all part of the natural ebb
and flow of markets, and especially in California, it is a
phenomenon that we have gone through before.

In the first quarter of 2007, however, we started to see
the surfacing of the "sub-prime crisis" that fully evolved by
mid-year.

In addition to the natural softening of home values, we now
had an extraordinary number of loans going into default,
with foreclosure activity increasing in alarming percentages.

The foreclosures accelerated the decline of market values
as more and more homes were coming on the market
where a homeowner was "giving the home away" to get
out from under their mortgage obligation.

Also, many borrowers were trying to sell their home even
though the amount they owed on the mortgage was more
than they could ask from a reasonable buyer. These are
commonly called "short sales" requiring lender agreement
to accept less than what is owed on the home.

As lenders took the homes back through the foreclosure
process, they now were marketing the homes to get as
much as they could for them. But, they were more
interested in getting the homes off of their balance sheet
and were less concerned about holding out for a particular
price.

So, we had a tsunami of lower-valued homes flooding the
market place, bringing everybody's values down in the
process.

New loan requests typically require an appraisal of the
home to determine the value. One of the major items that
an appraiser is expected to evaluate is whether the
neighborhood is in an appreciating, stable, or declining
market. As you might expect, almost all of the appraisals
have been coming back that homes are in a declining
market.

Underwriters of loans are supposed to analyze the appraisal
of the home as part of their evaluation to approve a loan
request or not. Each loan request traditionally was
reviewed on its own merits with the quality of the borrower
and the quality of the home both integral to the decision.

What has developed recently is a decision to overlay a
valuation determination that removes the underwriter's
ability to assess each loan on its own merits. Many
counties in California have been assigned to the category
of "declining markets".

What this means is that if the lender normally would consider
a maximum loan of 100% of the value of the home to a credit-
worthy borrower, and the home is in a "declining market", that
they will now lend no more than 95% of the value of the home.

This 5% reduction in maximum loans in relation to the value
of the home (LTV) is being applied across the board, even if
it can be proven by market data that a particular neighborhood
does not suffer from the distress that many other communities
are going through.

As an example, one of our major lenders published a list of
counties in California. Out of the 34 counties, 20 were listed
as "Severely Distressed", 12 were listed as "Distressed", 1 was
listed as "Soft", and only 1 had no negative label.

Because of this, and the fact that these kind of designations
are being imposed by regulators and FNMA and FHLMC guidelines,
loan programs that used to be readily available are being cut back.

If you are anticipating seeking a loan that pushes some of the
traditional maximum LTV limits, be prepared to hear that you
need more down payment or a larger equity position to get the
new loan.

As the pendulum has swung away from the permissive under-
writing that we saw prior to the "sub-prime crisis" and back to
conservative underwriting, this is another element that we must
deal with to help borrowers get loans that meet their needs.

Keep exploring options, ask lots of questions, and work with
mortgage professionals who can help counsel you through the
changes in the mortgage business right now.

President Signs the Stimulus Package-Conforming Limits Set to Increase Temporarily

Matthew Padilla of the Orange County Register put together
some facts about the new Stimulus Package and it's effect
on the FNMA/FHLMC conforming loan limits.

I have edited some of his research to apply it to how it may
affect the San Diego housing market.

Because it calls for increasing the conforming loan limit, it
now opens up the marketplace to sell loans - which were
previously classified as jumbo loans - to Fannie Mae and
Freddie Mac.

The jumbo loan market has dried up substantially since
around August last year with the available loans being
more expensive. FNMA and FHLMC have been the major
players in buying loans, this will provide needed liquidity
to an under-served portion of today's market.

The new limit is set to be 125% of an area's median home
price, but the law does not saw which median home price
will be use.

It gives the HUD Secretary up to 30 days to post a list of
median prices and conforming limits. A spokesman for HUD,
said prices will be set via counties, unless there's a
compelling reason to do it differently in certain areas.
The bill caps any increase to $729,750.

The new limits should be posted in early March on
www.hud.gov.

Theoretically, consumers can expect to have these changes
available in the next thirty days. But there are steps that
must occur before programs are available.

One of our major lenders has tried to manage everyone's
expectations by outlining the expected procedures.

First, FNMA and FHLMC will be assessing their internal
impacts to determine the delivery approach they will require
of mortgage lenders and investors.

Second, FNMA and FHLMC must communicate their
requirements to mortgage lenders and investors. This would
include maximum loan-to-value ratios, minimum credit scores,
whether refinances will allow for cash-out and any
number of other variables that will be considered in their
risk-assessment model.

Borrowers need to understand that FNMA and FHLMC are
now taking on some of the risks that the private investors
were previously taking. If a new $625,000 conforming loan
were to default, it would represent the equivalent of 1.5 loans
of $417,000 that could have defaulted.

Third, the lenders - once they have seen the loan programs
and parameters that FNMA and FHLMC have stipulated -
must modify their loan programs to meet those requirements
and make them available to consumers.

Those borrowers between $417,000 and up to the new loan
limit should find it cheaper to get a new loan, compared to
today's jumbo rates. We will have to see what rates are
being offered when the changes are implemented and
available to the public.

The changes are temporary, with a time limit imposed of
December 31, 2008. Congress could choose to extend
the time frame, but any consumer looking for whatever
relief may be available would be wise to act sooner, not
later.

This law should allow for more liquidity in the mortgage
market, and when money is more readily available, interest
rates have the opportunity to come down.

Let's hope that FNMA and FHLMC act quickly, that they
are not too restrictive in their risk assessments, and that
the lenders put the programs into place quickly as well.

Then we can offer more solutions to worthy borrowers who
are looking for relief from their current mortgage predicament.

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.