These rates are freezing
Five-Year Mortgage Rate Freeze Looms
Wednesday December 5, 8:42 pm ET
By Martin Crutsinger and Alan Zibel, Associated Press Writers
Bush Mortgage Plan Will Freeze Certain Subprime Interest Rates for 5 Years WASHINGTON (AP) — The Bush administration has hammered out an agreement to freeze interest rates for certain subprime mortgages for five years to combat a soaring tide of foreclosures, congressional aides said Wednesday.
The aides, who spoke on condition of anonymity because the details have not yet been released, said the five-year moratorium represented a compromise between desires by banking regulators for a longer time frame of up to seven years and mortgage industry arguments that the freeze should last only one or two years.
Another person familiar with the matter said the rate-freeze plan would apply to borrowers with loans made at the start of 2005 through July 30 of this year with rates that are scheduled to rise between Jan. 1, 2008, and July 31, 2010.
The administration said President Bush will speak on the agreement at the White House on Thursday and the Treasury Department announced that Treasury Secretary Henry Paulson and Housing and Urban Development Secretary Alphonso Jackson would hold a joint news conference Thursday afternoon with mortgage industry officials.
Treasury also announced there would be a technical briefing to explain more of the proposal’s details.
Paulson, who has been leading the effort to craft a plan, said on Monday that the program would only be available for owner-occupied homes — to ensure the break is not given to real estate speculators.
The plan emerged from talks between Paulson and other banking regulators and banks, mortgage investors and consumer groups trying to address an avalanche of foreclosures feared as an estimated 2 million subprime mortgages reset from lower introductory rates to higher rates.
In many cases, the higher rates will boost monthly payments by as much as 30 percent, making it very difficult for many people to keep current with their loans.
The plan is aimed at homeowners who are making payments on time at lower introductory mortgage rates but cannot afford a higher adjusted rate.
Through October, there were about 1.8 million foreclosure filings nationwide, compared with about 1.3 million in all of 2006, according to Irvine, Calif.-based RealtyTrac Inc. With home loan defaults still rising, the trend is expected to worsen next year.
The plan represents an about-face for Paulson, who until recently had insisted the mortgage crisis could be handled on a case-by-case basis. However, he and other administration officials became convinced the tide of foreclosures threatened by the mortgage resets represented such a severe threat that a more sweeping approach was needed. They opted for a proposal that was along the lines of a plan put forward in October by Sheila Bair, head of the Federal Deposit Insurance Corp.
Paulson and other federal regulators began holding talks with some of the country’s biggest mortgage lenders, mortgage service companies, investors who hold mortgage-backed securities and nonprofit groups that provide counseling for at-risk homeowners.
Under the typical subprime loan — those offered to borrowers with spotty credit histories — the rates for the first two years were at levels around 7 percent to 8 percent. But after two years, those rates were scheduled to reset to levels around 9 percent to 11 percent.
For a typical $1,200 monthly mortgage payment, the reset could add another $350 to the monthly payment, greatly raising the risks of loan defaults by homeowners struggling with the current payment.
The wave of mortgage foreclosures threatened to make the most severe slump in housing even worse by dumping more foreclosed properties onto an already glutted market, further depressing home prices and shaking consumer confidence.
The deepening housing slump has already roiled financial markets, starting in August, as investors grew increasingly concerned about billions of dollars of losses being suffered by banks, hedge funds and other investors.
The administration plan is designed to deal with the crisis by letting subprime borrowers who are living in their homes and are current on their payments to avoid a costly reset for five years. The hope is that by that time the housing downturn will have stabilized, clearing out the glut of unsold homes and halting the steep slide in prices that is hitting many parts of the country.
With sales and prices once again rising, the expectation is that homeowners will be able to renegotiate their current adjustable rate mortgages into a more affordable fixed-rate plan.
The housing crisis has become an issue in the presidential race with Democrats Hillary Rodham Clinton and John Edwards putting forward their own proposals this week that would go further than the administration.
Clinton said her own proposal that would impose a 90-day moratorium on foreclosures and freeze the rates for five years or until they had been converted to fixed-rate loans was a better approach that would help more people.
“Although the administration is finally giving the foreclosure crisis the attention it deserves, it seems that President Bush is going to give struggling homeowners far less than they need,” she said in a statement.
Mark Zandi, chief economist for Moody’s Economy.com, called the administration plan a good first step, but said the government eventually will have to go further given the problem’s size and the threat to the economy.
“This is the most serious housing downturn we have seen in the post World War II period,” Zandi said. “It is a threat to the broader economy. The risks of a recession are very high.”
Associated Press reporters Deb Reichmann and Nedra Pickler contributed to this report.
Housing Reality
When my wife and I were looking to move several years ago we would watch House Hunters on HGTV. The show had potential home buyers looking at three homes and usually selecting the third. We recently caught House Hunters and noticed the format was slightly different, the potential home buyers would look at three homes but the home they selected would be disclosed at the end. It could be the first home, second or third.
If there’s one thing that’s remained the same, it’s the cliches (spacious home; motivated seller; pet friendly) that the real estate agents use time and time again. If you’re curious to see what these cliches actually mean, you’re in luck. The St. Paul Real Estate Blog has them:
What the REALTOR says: What the buyer sees: Hip neighborhood A lot of kids Exciting neighborhood A lot of bad kids Pet friendly Reeks of cat pee Amazing views Interior shot Recently renovated Interior shot, but painted Great curb appeal They painted the front Charming Dank Historic Dank Charming, Historic Very Dank Period fireplace Fire hazard Quiet neighborhood Compared to very busy street nearby Close to Downtown Quiet neighborhood Great neighborhood Police sweeps recently completed Starter home Not exactly finished, but started Move-up house Needs to be jacked up, sinking Fixer-upper You don’t want to know Great amenities They replaced the 1970s fridge Exciting opportunity They didn’t replace the 1970s fridge Good schools (ignored - everyone says this) Near parks Near parking lots Ready for your updates Beat up Well-loved Beat to Hell Close to Universities Tiny, possible fire code violation Active condo association Insanely high association fee Low association fee Hello “special assessment”! Motivated seller In foreclosure
FAQ: How do I save on closing costs?
Q: How do I save on closing costs?
A: To save on closing costs, you need either strong negotiating skills or a lot of time on your hands to shop.
Strong negotiating skills: When dealing with a lender one on one, you need to realize that everything is negotiable. It’s a matter of who’s going to pay what. If you don’t want to pay for an appraisal, a credit report, a processing fee, etc. you can let the lender pay for them but you may get a higher rate. Some lenders pay for your appraisal especially if you’re a referral or a repeat customer. Some lenders charge an application fee on their good faith estimates only to waive it at closing. Have your lender explain each fee. If they have trouble explaining a fee or if they say “don’t worry about this fee” or you should choose another lender.
Lot of time on your hands to shop: Have lenders compete for your business. However, when lenders compete you have to remember that not every lender plays by the rules. One lender may give you the deal of a lifetime just to get your business and surprise you with a higher rate or costs at closing. Make sure you shop on the same day as well since rates change daily and make sure you only compare the lender portion of the good faith estimates (section 800) since some lenders may not include title and government fees.
The real answer is caveat emptor.
Top Five Fridays - ESPN Personalities that don’t suck
Last week I listed my top five ESPN personalities that in my opinion and many others should get canned. Here are my top five that should get raises:
- Jim Rome: Says what every fan wants to say. This video of him calling Jim Everett “Chris” is a classic. Jim Rome went on to bigger and better things (Rome is Burning), Jim Everett didn’t.
- Stephen A. Smith: This is my house, but you’re welcome anytime! Leno and Letterman are snoozefests compared to Quite Frankly with Stephen A. Smith.
- Kenny Mayne: His trademark dry wit is well suited for his segment on Sportscenter called the Mayne Event. He’s also the pitchman for Progressive Insurance.
- Chris Berman: ESPN without Chris Berman is like the White House without a President. Three words: Curtis “My Favorite” Martin.
- Suzy Kolber: With all the grace in the world she handled Joe Namath’s infamous “I want to kiss you” pick up line. Sideline reporting at NFL games are ridiculous except for Monday Night Football when Suzy is around.
The witchhunt continues
Appraisers are next up on the Colorado foreclosure agenda according to the Rocky Mountain News article:
Erin Toll’s top priority as the new director of the Division of Real Estate for Colorado is to shut down appraisers who are artificially inflating home values, contributing to the state’s escalating foreclosure crisis.
The article also articulates the ABC’s of appraisals:
- An appraiser’s job is to inspect the size, condition and quality of a home and review, verify and analyze market data for the home to determine its value.
- Loan amounts rely on the value calculated by the appraisals.
- Lenders typically require real estate appraisals for both purchases and refinances.
- The appraisal protects lenders so they don’t lend more than a property is worth as well as buyers so they don’t pay too much.
- Appraisers must be independent and should never assign a value just because a lender or real estate agent wants a specific price.
- An appraiser will inspect a home inside and out, as well as use county and other real estate data to compare the house to similar ones that have sold in the neighborhood to determine its value. A good appraiser looks at the comparable homes to make sure they really are similar.
- In addition to obvious things such as the size and condition of the home, the number of bathrooms and bedrooms, an appraiser will add value for things such as a well-done renovation, but will subtract value if the home needs work, such as a new furnace or a paint job.
- A detailed professional appraisal can run 30 to 35 pages.
We liked you better, but….
One of the most disappointing experiences in my young career as a mortgage professional is when potential borrowers called me to let me know that they were going with the real estate agent’s lender. Their exact words were “We liked you better but we got a better deal.” The bad news came on the heels of me working til 12 AM the night before getting the loan documents ready to submit to underwriting the next day. It was a bitter pill to swallow.
Whether or not my potential borrowers did in fact get a “better deal” is highly unlikely. More often than not, borrowers end up with higher rates than what they were initially quoted. The stark reality of the mortgage business is that it’s super competitive. However, with competition comes deceit and fraud. When you swim with sharks, the sharks call it “salesmanship” or “doing whatever it takes to get the deal.”
When I meet with borrowers that I know are rate shopping, I challenge them to be more BS sensitive than RATE sensitive. I also tell my borrowers how to shop for a mortgage, following three simple rules:
- Shop on the same day. Rates change every day, sometimes during the day. So shopping on different days or different weeks is not very effective.
- Get a good faith estimate then compare only the 800 section. These fees are what lenders charge. The title fees, reserves, government recording fees, etc. are variable.
- Buy Tylenol or Advil. Shopping for a mortgage is a headache and if you choose poorly, expect your headache to get worse.
Last rule…. if a lender says “I can get you the best rate” or “I can beat my competitors rate”, you should seriously consider another lender. As lenders, we all lend money from the same pool, so there’s not much discrepancy in rate but a huge discrepancy in service. So shop wisely!
Want to ride a roller coaster?
For the past couple of months, I’ve devoted a good chunk of my mornings reading the Denver Post and Rocky Mountain News. Occassionally I’ll blog about the articles. Most of the time, I’ll pass and blog about something else.
A friend of mine in Las Vegas noted that the Las Vegas real estate market was bad but nothing compared to the Denver roller coaster. He said that everytime he reads anything related to Denver real estate it’s about “foreclosures, high inventory, and lenders getting caught with their pants down.”
Based on two articles in the Denver Post and Rocky Mountain News, my friend in Las Vegas was right. The Denver real estate market was going through a roller coaster ride during the months of July and August.
The Denver Post view of this roller coaster:
Metro home sales up; prices dip
The median price of condos and town homes sold during the month fell to $160,000, down from $163,000 in July and $164,000 in August 2005.
The median price of single-family homes sold during the month fell to $252,900, down from $259,500 in July and $255,000 a year earlier.
Compared with August 2005, single-family home prices were down 0.8 percent, while condo prices were down 2.4 percent.
The Rocky Mountain News view of this roller coaster:
August home sales drop 11% from year ago
August home sales activity in the Denver area dropped by almost 11 percent from a year ago but showed a 2.4 percent increase from July, according to studies released Thursday.
There were 5,673 previously owned homes placed under contract in August, down from the 6,351 a year earlier, when mortgage rates were lower. But the August number was up from 5,538 in July.
Weekend Highlights
Al Lewis of the Denver Post discusses the glut of condos in Colorado:
“Colorado’s inventory of unsold condos is at an all-time high,” said Gary Bauer, an independent real-estate analyst in Denver. According to Bauer’s analysis:
* Condo sales have slipped 1 percent year-to-date, compared with a year ago.
* The average price of sold condos year-to-date is down 1.5 percent to $185,000, compared with a year ago.
* Condo owners are increasingly renting their pads instead of selling them in a depreciating market.
Great article in Sunday’s Denver Post entitled Man’s dream house wasn’t dream project. The home was based on Frank Lloyd Wright design principles and carries a $1.4 million price tag. Includes a do’s and don’ts of home building.
DON’T
Be your own contractor. “People often think they can save 15 percent on a house by being their own contractor,” said Formissano. “What they don’t understand is the time and frustration involved. Besides, subcontractors rarely give their best bids to homeowner/contractors.”
Make a decision based on price-per-square-foot costs. “It’s an inaccurate way to decide what you can afford,” said Formissano, “because it doesn’t factor in all the project costs, like landscaping, driveway, septic system, etc.”
Get caught in the trap of multiple “small” upgrades. People tend to drive the budget up with “a little change here, a little change there,” because they rationalize that this is their one shot at building a dream house. “Most budgets are broken by $100 changes,” said Formissano, “not $1,000 changes.”
Pick a floor plan that has lots of angles or a complicated roof design. You can have an interesting house by aligning spaces on an axis, but as LeChevalier learned, the more complex the design, the higher the costs. And ultimately, construction complexity doesn’t add to resale value.
DO
Carefully select a builder. You want someone who listens to you and explains things to your satisfaction. Ask for references and check them out.
Make sure you have 5 percent to 10 percent of the project costs set aside for contingencies or extras. “If you’re building a $500,000 house, make sure you have $25,000-$50,000 set aside for an upgrade you really want or a problem that hikes the cost up,” said Formissano.
Make sure the floor plan works for you. Is the kitchen so far from the garage that carrying groceries will be like a marathon? Is the only way to access your closet through the steamy master bath?
Make decisions in a timely manner. As the house gets closer to completion, homeowners are asked to make more decisions in a shorter amount of time. Since time is money, dragging out a choice - for fear that a better one will appear tomorrow - will drive the budget skyward.
Creative Financing gone wrong
Rates pinch homeowners discusses the perils of option arms or creative financing. Here’s my take: These loans are very complex. If the loan terms confuse you, either the lender didn’t do their job explaining the loan or you simply just don’t comprehend all the math involved.
Start Rate is the bait:
For their new loan, Cordova- Holmes and her husband chose a so-called option adjustable-rate mortgage, which carried an introductory rate of 2.35 percent and gave her multiple payment choices each month. “I had a lot of financial obligations,” says Cordova- Holmes, an accountant who lives near Detroit.
Too good to be true:
Two years later, however, the interest rate on her loan has jumped to 8.75 percent, her loan balance has climbed to $324,000, and her minimum monthly payment has risen to $2,257. She says the terms of the loan weren’t clearly spelled out.
Deliquency increases:
Mortgage delinquency rates hit 2.32 percent in the second quarter after bottoming out at 2.06 percent in the fourth quarter 2005, according to an analysis by Equifax/Moody’s Economy.com.
The portion of adjustable-rate mortgages that were at least 90 days past due has climbed 141 percent in the past year, according to a recent study by Credit Suisse that looked at loans made to borrowers with good credit. That compares with a 27 percent rise in such delinquencies for fixed-rate mortgages.
Foreclosure is around the corner:
Until recently, most mortgage-payment problems were an unfortunate byproduct of major life changes, such as job loss, medical problems, divorce or a death in the family. But for the new wave of troubled borrowers, the problems stem largely, or in part, from the structure of their mortgage, housing counselors say.
Weekend Highlights
Here are the real estate and mortgage highlights over the weekend:
- With rates on the rise and a cooling housing housing market, this article discusses how builders are switching their focus from Single Family Residences to Townhomes and Condominiums.
The cooling housing market has homebuilders throughout the nation girding for fewer sales, larger inventories and stiffer competition for people in the market for new homes.
Rising mortgage rates and overbuilding are largely to blame, yet the pace of construction continues as builders rebalance their holdings, move from single-family to attached-home projects, and search for lucrative niches to fill.
- The cooling housing market is also a reason for apartments increasing their rent and their occupancy rate.
The Denver area’s vacancy rate was 7.4 percent for the first quarter, compared with 7.9 percent for the fourth quarter last year, according to the Apartment Association of Metro Denver. The rate has been steadily dipping since the end of 2004, when it hit 10 percent.
…
The surge in apartment rents and occupancies in the West is the result of rising mortgage rates and home prices, which have pushed potential buyers to rent instead, said Caroline Latham, owner of Novato, Calif.-based RealFacts. Read more - Al Lewis’ column discusses short selling your home when foreclosure is around the corner.