Rates .. up, up and away!

Off we go! As predicited by many ( me included ) rates have begun their run up after the Fed has now exited the MBS market. In November of 2008 when the program was announced 30 year interest rates dropped 1% in a day. While rates didn't jump back up 1% on Wednesday when the program ended there had been indications that they would move up.

Now after 18 months of rates at or below 5% all of us wroking with residential buyers now get to be grief counselors when a borrower hears that they won't be getting the same rate as their neighbor who purchased or refinanced recently. If a borrower didn't lock their rate last Monday it's too late.

I expect that we will see an upward trend to somewhere in the 5.5% to 5.75% range over the next week or so. Already in the last 10 days the 10 year treasury is up .306% and climbing. Rememebr while the 10 year is not the only marker for 30 year mortgage rates it is one that allows for a "quick and dirty" check of where rates could be going.

Price vs Rate---Focusing on the right aspect

Where will home prices go in the future? In most markets in the US it is unlikely we will see any more radical deterioration in home prices. Data suggests flat or slighlty rising home prices on a natioanal scope with some markets going up and fewer going down.

I would suggest that a more important question to be asked is: Where will rates go? And that's really easy to answer...up. Rate increases will have a bigger effect on a buyer's ability to afford a home ( or not ) than where prices will go. So as we talk to potential buyers about what the future holds I will almost always focus on rates.

Why? For one simple reason. In order to offset an increase of 1% in an interest rate on a 30 year term loan a borrower's loan amount would have to drop by approximately 10% to keep the same approximate principle and interest payment. For almost every borrower,  payment, not the price is the major determinant in what to pay for a home. When I talk to borrowers they don't ask me what they should pay for a home they ask what payment the payment will be. Are they shopping price or rate?

Tax Time Advice--Watch those deductions

Well not exactly tax advice but a caution on how taking deductions can limit your ability to borrow later on.

As most self employed folks know conventional lending can be a challenge. Taking all the deductions you are allowed tends to limit your borrowing ability. Even though someone can be bringing in literally hundereds of thaousands of dollars a year if they follow the rules they can avoid paying taxes on that income. The issue is that these deductions are a "hit" to the borrower's income in an underwriter's eye. The solution is to limit your use of deductions ( yes pay the damn taxes, it's a quality problem to have ) so as to not box yourself out of the ability to borrow down the road.


For those that are W2 employees there is a tax deduction trap that many don't know about, 2106 unreimbursed employee expenses. Any of these deductions are looked at just like an ongoing debt obligation like a car payment, student loan or credit card payment. These can be a killer for a potential borrwer because they don't expect it to be a hit to income. As an example, I had a borrower take 43,000 miles in unreimbursed expenses at .55 a mile. The effect on the tax return was no doubt a positive one, Uncle Sam gave the borrower back every dime that had been taken in withholding. But...the underwriter hit them for $1182 a month for the "ongoing" obligation basically wiping out 1/2 of the income to qualify for a loan. Yes the underwriter gave back .22 a mile in their analysis but it was too great an obstacle to overcome.

The tax time advice?  You should be talking to your mortgage professional about the implications of taking ALL of your allowed deductions BEFORE you file. Once the IRS has your information it is set in stone.

Rates are going up, who cares?

As anticipated the Fed announced this last week that the facility used to purchase mortgage backed securities will be wound down at the end of this month. This along with a couple of other "manipulators" has kept rates in the 5% range since late November 2008.



Advice to potential buyers and refinancers, get em while they are hot or expect rates in the high 5%'s or low 6%'s. Not that I would suggest a potential client buy a home or refinance just because of a particular rate. I am not a mouthpiece for the National Association of Realtors and I don't believe anytime is a good time to buy a home.



The conversation that every potential borrower should have with themselves is the one that cannot be based on any perceived sense of the state of the market. A borrower's metrics should be based on their personal situation:

Can my household budget handle the potential costs of maintaining a home beyond the mortgage payment? After all, not being a renter means you pay for the water heater that goes out on Christmas eve.

Am I buying the home to live in or as an investment? If you are going to live in it then I would challenge the theory that it is an investment that will offer you any rate of return over a short period of time that could be perceived as investment grade.

Does the use of the tax credit make sense to my situation? It may surprise some to learn that a few borrowers look at getting $8000 in exchange for a $200,000 mortgage as a bad idea. Can't say I have very many arguments against that.



Those of us older than 30 know that rates now are historically low. Even at 6% or 6.5% they would still be classified the same. I would expect if rates were to spike in the next few weeks the pool of potential borrowers will dry up. At least until they reset their expectations of where rates are. At which point, they will come back.

HVCC--A bad idea who's time has come, to go away

The first month of the new HVCC appraisal rules have certainly been entertaining. A petition is circulating, http://www.hvccpetition.com/ . Everyone in Real Estate should sign this even if you think the new rules are a good idea, that means you Mr. Cuomo because this thing is FUBAR. Here's some of the text ( not of my own making ) from an email I received and forwarded to my sphere of influence last Friday:

This is NOT an Appraisal problem, it's an APPRAISER issue. Regulating the entire industry at a higher cost to the consumer is not a better answer than dealing with the "Few" appraisers or lenders who are not ethical and/or following the current rules. HVCC has created an environment where inexperienced appraisers are completing substandard work with a middle man (AMC's) adding no value to the process. The entire HVCC process results in poor service, poor appraisals and slower turn times for the consumer.


It was a long email but it had some great points. One in particular, the "system" doesn't work, period. If a lender is relying on an AMC then they are continuing the problem. A broker I used to work for said today his appraiser is still getting orders demanding a specific value or the deal won't "work". Exactly the thing that was supposed to be stopped.

All of us are now dealing with long order times, flat out rejection of orders, or having reports generated by an appraiser from out of the area. This last issue is especially troubling because of a value is being established by someone that is unfamiliar with the market. This isn't a new problem, it was happening before. It's just magnified by the restrictions in the new rules.

Appraisers coming from scores of miles away where they likely don't have access to the MLS system to determine sold values. And even if they do have access to the local MLS an out of town appraiser won't have an understanding of the subject property's market. The appraiser in closest proximity to the subject property is supposed to get the order. But if a lender doesn't have an appraiser in their system that is located in the same town as the subject home then an out of towner gets the work. Agents love getting phone calls from out of town appraisers. Go ahead ask one about that, it will be a lively conversation.

No doubt there was abuse, collusion and other nasty things going on before. Thanks to WAMU, Countrywide and their respective wholly owned appraisal companies for making every one's life a little more difficult than it should be. If it wasn't for these two (now extinct) company's abuses Loan Officers would still be able to manage one of the most important parts of a transaction. HVCC has outlawed communication between loan officer and appraiser. Sign the petition, write your congressional representative. HVCC is a knee jerk reaction.

Tax Credit as a down payment part 5...FHA Get's a Clue

The way the roll out of how HUD was going to allow the use of the tax credit as a down payment prompted me to joke that Gilligan was going to be the next Secretary of HUD and The Skipper would be put at the helm of FHA. While I still maintain that HUD is a dysfunctional bureaucracy it is refreshing to see that someone(s) in there realized that a free for all use of these funds was not a good idea.

Here's the link to HUD's website, read the mortgagee letter for yourself, you will see that this alleged final version is quite a distance from Sec. Donavan's announcement to the NAR a couple of weeks ago; http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-15ml.doc .

News media and other bloggers, me included, are all over this announcement. I want to thank Dan Allen ( http://theallenteam.yourkwagent.com/ ) at Keller Williams Mid Willamette for the tip early Friday morning on this.

The one thing that everyone needs to know is that the borrower will still need to come to the table with the minimum 3.5% down. This credit cannot be used to get a borrower to 100% financing, oh thank goodness. There are a specific set of conditions that need to be followed in connection with this credit. In order to make these funds available at the close of escrow the tax credit has to be monetized. So the borrower will need to take out a second lien or "sell" their tax credit in order to use the funds.

So who is going to carry the second lien? Who can a borrower sell their credit to to get at this money? Good questions, that don't have answers yet, these are certainly not addressed in the mortgagee letter. All the policy announcement states are the conditions under which it can be done. It's these two questions that will determine how long it will be before this is actually implemented by lenders...my guess, 4 to 6 weeks before lenders get this all figured out.

One other item to note. Just because this policy is out doesn't mean every non profit, governmental agency or lender has to participate. And, although 17 states have or are working on implementing this doesn't mean the other 33 states will. Neighborhood Housing entities run by municipalities and established non profits will be the only source of accurate information on this that I would rely on. For now, watch for the scammers there is plenty of money to be made off of people that won't understand what this policy is all about. The usual suspects in my market area ( LOs that have already marketed this, you know who you are ) are making this sound like it needs to be done today. As in Part 1 of this series, I say wait for it. You won't be disappointed.

Appraisals, Appraisal Reviews and the New World Order of Closing a Deal

Several closed loans and many conversations with RE agents got me to thinking ( Thanks specifically to Ric Vega, http://ricvega.com/ and Don Bartley at Keller Williams Mid Willamette) about how most buyers have dealt with the issue of appraised value in a RE deal. In the past, borrowers of mine have followed the same pattern: 1, gets an offer accepted, 2, has "x" number of days to complete inspections, 3, negotiates any issue(s) that come up and then, 4, orders the appraisal. The logic was, why spend money on an appraisal if the deal was going to die because the house was a piece of crap. Appraisal gets done, value is at, above or just a wee under sales price...done, buyer has a new home.

Fast forward to 2009. Lenders are bashing on the one last thing that is available, the collateral. In order to be able to sell loans on the secondary market ( or even have the option to at a later time ) lenders must be able to say with more surety than ever that the loans they are doing will not go bad. The pressure on lenders to do their due diligence on a loan is more extreme than many may realize. This is nothing as obvious as qualifying a borrower on income, assets and credit history. Those restrictions, while frustrating to all those who participated in a deal facilitated by a stated income loan in the past, are going to be nothing compared to this. I would suggest we all come to grips really, really soon with the terms "Insufficient Collateral" or "Reduced Value".

Examples? Sure; a re finance client from another lender with 800 FICO scores, a 9% debt to income ratio and 85 months of payment reserves denied on a 50% loan to value transaction. This is what was known as a "make sense" deal. Not any more. A comment by the borrower was, " They wouldn't do a loan for me because they said they wouldn't be able to sell my property when they foreclosed on us. We are never going to miss payment!" A value reduced 15% by a review appraiser from the original value. Used 2 of the same comps but reduced the value of the subject by $5000 because it had a less superior view, both properties are in a residential neighborhood. Did the comp have a view of the neighbor ladies changing room? That could be construed as a superior view by some, but I don't know that it's worth 5 grand.

From my perspective we are seeing another manipulation of values. One that may do more harm than good. The first one, the restrictions on borrower credit, was in reality a very reasonable step to take. But now we are seeing the restriction of credit based on automated criteria in computer models for the valuation of a subject property. The use of Automated Valuation Models is the primary determinant if an appraised value will be subject to additional review. All by itself this has the potential to drive values even farther down than they would fall as a result of normal market forces. It's another vicious cycle that could kill a lot of deals late in the game. The issue will now be that sales transactions will be more likely to fail due to appraisal issues rather than inspection ones.

The reliance on AVMs is understandable, on the surface anyway. Taking the human element out of the valuation process removes any possibility of fraud or other nasty bad things that could happen. These systems are likely to be very robust in their analysis. After all, automated underwriting systems have made all approved loans non defaultable, right? But as with all computer models, garbage in, garbage out. In states where sales prices do not have to be recorded accurately ( or at all ) the quality of the information is at best suspect. Yet, lenders AND investors in mortgages rely on AVMs to quantify the risk associated with a particular property's value. I have argued, successfully and unsuccessfully against their use. For now, the battle continues.

My solution is to suggest the reversal in the order of inspection / appraisal regimen. The borrower should order the appraisal first, see if any value issues arise that may cause them to renegotiate or walk away from their contract, then order the inspection. After all, the appraiser will note any grossly obvious defects in the home that the inspection will no doubt flesh out. For the seller, well you guys are pretty well hosed right now, whether you think so or not. May as well get the really bad stuff out of the way early. Any seller that thinks they can dig their heals in on "their" price better take a look around and have their listing agent to give it to them straight. The first offer you get will be the best and highest one you will get, better take it and hope the borrower's lender doesn't come in and make your listing agent's CMA look like doody.