Portland Real Estate Blog

On October 4th, FHA rules will change regarding Mortgage Insurance Premiums collected up front and the monthly rate charged. Any FHA case number issued after October 4th will be subject to the new rules. The application for a case number takes place after there is an accepted offer on a specific property. I worked with Columbia Mortgage’s Liz Marré to put this spreadsheet together to illustrate how the changes impact a buyer.

Every scenario will be different but for this case we used a $300,000 purchase and assumed a 4.25% 30 year principle and interest loan.  Closing costs and other factors are not included.  We added a 6% interest rate column as well.

The first rule change is a reduction in the financed up-front mortgage insurance premium will drop from 2.25% to 1%. That’s a loan reduction of $3,618 in this example. The second change increases the monthly insurance to .09% of the current loan which results in an initial increase of $67 per month even after the principal reduction from the first change.  You must carry mortgage insurance until the loan to value (LTV) reaches 78%.  On average, that takes about 10 years.  Note: as the monthly insurance charge is based on that month’s loan principle the amounts of the one and five year comparisons are somewhat inflated as the monthly payments will drop slightly each month.  This simplified version does not factor that in.

The other affect of the rule change is a reduction in buying power.  Because of the higher monthly payment, the amount the buyer qualifies to borrow drops as well.  A buyer who is purchasing at their max price ($300,000 in this case) has their loan maximum drop  $13,600 which may prevent the purchase altogether.

Federal Housing Administration (FHA) home loans make up 30% of all home loans; up from 3% in 2006.  Whereas a “normal” loan requires 20% down, a home can be bought with an FHA loan for as little as 3.5% down.  Defaults are up too which means they need to tighten lending requirements and fees.  As a side note it is worth mentioning that for a buyer to buy an condo with an FHA loan, the building must have FHA approval.  Owners/Home Owners Associations of condos in non-FHA approved buildings are urged to investigate what it takes to become FHA approved.

Most of the changes will raise the cost of the loan and/or the out of pocket expense at closing.  Some can be wrapped into the loan, others must be paid:

1. Lowering the amount of closing costs a seller can pay.  Currently 6% of the sales price, that might drop to 3%.
2. An increase in mortgage insurance rates.  Mortgage insurance is a feature of most loans where the loan-to-value is lower than 20%.
3. Credit score minimums.  There have previously been no stated minimums by FHA, the banks themselves made the determination.  500 would be the new minimum (the gold standard is now 740 where it was once 720).  The lower the score the harder it is to qualify for lower down payments.  There would also be more emphasis on debt-to-income ratios and factors as well.  Banks have scrutinized FHA loans less than their own as losses are guaranteed by FHA.

At the same time, FHA is also working with existing homeowners with FHA loans and negative equity to refinance.  It is better for FHA to refinance than to take the home back on default.  The Short Refinance program will start accepting application on September 7th.

Do interest rates matter?  For quite a few years now we’ve all been hearing that “rates are at historic lows and will only go up.”  It was true then and it seems to be true now and the statement fuels the “Buy Now” debate.   I think we are better served by educating and giving the tools for the individual to make an informed decision.  Rates have bounced around but most would say that 6% is a really high rate.

Assuming all other things being equal, the difference between a loan at 5% and a loan at 6% is 5.23% over seven years (the payment difference is $62.73/month/$100,ooo borrowed).  Why seven years?  That’s the average time of ownership of a home according to NAR.  That means in seven years on a $300,000 mortgage the 5% loan has saved over $15,000 in interest expense.

I used this Lendingtree calculator for my figures.

The following eight are things that you need to consider before listing your home for sale if you are delinquent on your mortgage payment.  The list is from a Prudential Northwest Properties’  disclosure.  There are some serious ramifications to some of the options which is why “you may need the assistance of an attorney” shows up so often.

1. Reinstatement: Bring the loan current. This is recommended if your financial hardship was temporary. You will have to pay all missed payments, late fees, and legal fees that are due.
2. Forbearance: In the event that you cannot entirely pay your deficiency, you may be able to either negotiate a repayment plan with your lender, or add the balance to your principal. You may need the assistance of an attorney.
3. Refinance: If you have sufficient equity and income, and you still have healthy credit, you may consider refinancing.
4. Loan Modification: Some lenders may be willing to modify your loan by either lowering your interest rate or principal to keep your payments affordable. You may need the assistance of an attorney.
5. Rent the property: If your mortgage payments, Insurance, taxes, and other housing fees are less than what you could rent your property for, this is your last option to keep your home without having to sell it or lose it in a foreclosure.
6. Sell the Property: If you have sufficient equity, but your payments are higher than what you can afford, selling your property is certainly an option.
7. Short Sale: If you owe more than what your property is worth, and none of the above options apply to your situation, then this may be the best option available to you. There are many, make sure that you understand them. You may need the assistance of an attorney.
8. Deed in Lieu of Foreclosure: In effect, this is very similar to a’ short sale, but you will need the assistance of an attorney. Although, it does become complicated when there Is more than one lender Involved. Your lender may be more likely to approve a short sale than a deed in lieu because a deed in lieu places the property in their possession, whereas a short sale will get the property off of their books.

Not only is it important to discuss issues with your attorney, it is also necessary to discuss your financial situation or changes in your finances during a listing with your Realtor.  It may be an uncomfortable conversation but what might appear to be the best course of action may change and the process may change which could impact the sale.

I mentioned in this morning’s post that interest rates are low.   Google has a Mortgage Comparison search engine which is interesting, if not somewhat misleading.  Note that the image does not mention ads but the url is: https://www.google.com/comparisonads/mortgages. I’ve found it listed as both a sponsored link and a separated result between the sponsored and organic results.  I am not a fan of Internet mortgage companies and we do usually advise our clients to work with a local bank or mortgage broker [Prudential Northwest Properties owns Columbia Mortgage].  The results are instructive though.

All other things being equal, the change in payment between a loan at 4.75% and 5.25% is $91.62 per month on a $300,000 (30 year fixed) loan.  According to the Google Comparison this is what happens with interest rates as credit scores change:

• Excellent (740-850)- Lowest rate (not APR) of 14 lenders: 4.625%
• Very Good (700-739)- Lowest rate (not APR) of 14 lenders: 4.75%
• Good (660-699)- Lowest rate (not APR) of 14 lenders: 4.75%
• Fair (620-659)- Lowest rate (not APR) of 7 lenders: 4.75%
• Poor (580-619)- No lenders quote

THIS IS THE IMPORTANT PART:

Though it appears that your credit score doesn’t impact mortgages; it does:

• Excellent (740-850)- APR range of 14 lenders: 4.851% – 5.283%
• Very Good (700-739)- APR range) of 14 lenders: 4.964% – 5.295%
• Good (660-699)- APR range of 14 lenders: 5.184% – 5.721%
• Fair (620-659)- APR range) of 7 lenders: 5.198% – 5.621%
• Poor (580-619)- No lenders quote

All of the above comparisons are quoted from the Google Mortgage Comparison using $360,000 with 20% down in Oregon for 30 year fixed loans including FHA with up to 1 point in fees (by switching to 4 points, I can get a quoted rate as low as 4.25%).  The quoted rate is just that, a quoted rate.  The APR is designed to show the true cost of the loan with lender fees and origination points.  There are no brick-and-mortar banks that I recognize in any of the quotes and the banks listed are paying to be there, not a result of Google crawling for interest rates.

Just one more reason for buyer beware.

NPR’s This American Life program was titled “Return to the Giant Money Pool this weekend.”  It is a 58 minute podcast that can be streamed for free through this week.  Then it will be available in the archives.  I got to listen to about a quarter of the show live yesterday and will go back to catch up on the rest.

Sewer scopes reveal all sorts of things: cracks, roots, clogs, transitions from terracotta to cast iron, and even completely shattered or nonexistent lines.  This was a new one for us: the yellow conduit at the top of the sewer houses an active gas line!

Portland’s sewer system is decades old but people are still converting their houses from oil to natural gas or building new houses with natural gas.  The sewer lines aren’t always exactly where expected and in this case, the new gas line conduit was bored by machine, not laid in an open trench so the nobody ever saw the sewer line.

When the mortgage market collapsed fixed rate jumbo loans disappeared.  Adjustable Rate Mortgages (ARMs) have been available but at very high rates.  When looking at the Market Tracker graphs on PDXBuyers.com it doesn’t take long to see that the market typically financed by the jumbo loan market has been hit harder than the conforming market.  That’s starting to change.  I met with Scott Kirkland of Team Kirkland Home Loans on Wednesday and he explains:

Conforming loans are those loan amounts under $417,000 while Jumbo loans are loan amounts over $417,000.  Rates on these two types of mortgage products used to be very close in rate.  This stopped about a year ago when only loans bought by Fannie/Freddie (backed by government) were the only “safe” bonds to purchase.  When this happened, your portfolio lenders – those buying up Jumbo loan products – had no one to buy their loans thus driving up the rate on any loan over $417,000.
Housing product listed over $417,000 has been dramatically dropped in price because the interest rates were much higher on this more expensive paper.  A conforming loan rate might be at 4.75% while the same borrower would have to pay 7-9% on a Jumbo loan.  This has driven many buyer’s away from the $450+K house price range.  We have seen competition in the lower price ranges pick up as of recently due to more expensive financing on any loan over conforming limits.

Jumbo rates are coming back!  There are lenders out there today who have recognized this problem and are now offering Jumbo rates at 5.5% (5.75APR) on a 30-year fixed.  These lenders have taken some of their government monies recently received to create a solution for those buyers and sellers affected by the high rates on Jumbo loans.  Now that rates on loans over $417,000 are starting to return and become more in line with those conforming loans, expect the inventory levels in the higher price ranges to shrink.

We’ve seen how dynamic the mortgage market has become.  What is available today may not be tomorrow.  The loans have high loan to value ratios (30% in Portland) so there is a considerable down payment requirement.  An FHA loan could require as little as 3.5%.  Will the banks offering these loans run out of money due to popularity or will other banks return to the market?   In many respects, the answer is vital to the real estate market.

I stuck my head into the office of Columbia Mortgage’s Shawn Headlee this afternoon. Mainly thinking of myself and that maybe a refinance might be worth investigating. It would be if we were not in a jumbo mortgage situation. He says that rates on jumbo mortgages (over $417,000) haven’t shifted much so no dice for me.

On the other hand, one of our clients that he is working on the loan for got a lower rate than previously locked for free! Things have changed drastically in the mortgage market in the last few days. The refi market may suddenly reappear. Too little too late? Won’t matter, market is toast? Just what the doctor ordered?

Last night KOIN ran a story featuring Rob Levy who is in Prudential Northwest Properties’ West Portland office as well. I think Rob paints an accurate portrayal of our market.

This is a bit of a departure from my usual format as I normally don’t paste articles in their entirety but since this was emailed to me and all the sources are cited, here it is. Two different views of the risk to Portland real estate because of subprime issues. I searched Oregonlive.com for both articles with no result:

“Mortgage Meltdown: A subprime disaster area or use of subprime facts?
Gerard C.S. Mildner
Sunday Oregonian, August 12, 2007

Perhaps like me, you were alarmed by Angela Martin’s op-ed article about impending problems in Oregon’s housing market (“Subprime Disaster Heading for Oregon,” 8/5/2007). The alarm turns out to be misplaced, as there is no evidence that Oregon suffers any greater risk than the rest of the country of a housing market collapse due to subprime loans. In fact, borrowing and lending practices in Oregon are surprisingly conservative.

Subprime lending refers to mortgages issued to borrowers with low credit scores and hard-to-document incomes. Because of the increased risk of default, these borrowers are charged higher interest rates. They are often unable to afford traditional fixed rate mortgages and take out higher risk loans, including adjustable-rate loans, no-interest loans, teaser-rate loans, or payment option loans.

In her article, Martin, Director of the Economic Fairness Coalition of Our Oregon, argues that subprime lending in Oregon tripled between 2004 and 2005, that forecloses rose 23 percent in the last quarter, and that Oregon ranked seventh in the nation in negative amortizing loans. This is misleading.

The truth is that Oregon has one of the lowest rates of risky mortgages in the country. In a July 2006 report, the National Association of Realtors found that the Portland metropolitan area had about half the rate of subprime mortgages as the nation as a whole (5.7 percent vs. 10.1 percent) and a much smaller percentage of mortgages with loan to value exceeding 90% as the national average (7 percent vs. 16 percent). And in a September 2006 report, the Consumer Federation of America found that our rate of subprime refinancing was the lowest of any state.

In terms of delinquencies and foreclosures, there is no crisis in Oregon. According to the same National Association of Realtors’ study, the mortgage delinquency rate in Oregon is half the national average: 2 percent vs. 4 percent. Martin’s evidence for an “explosion” in foreclosures comes from a four sentence article in The Portland Business Journal, which in turn is a rehash of a press release by a Web site that promotes the selling of foreclosed homes.

Instead, a March 2007 report by a more credible source, the parent company of First American Title, finds that delinquency rates for prime mortgagees, subprime mortgages, and home equity lines in Oregon are some of the lowest in the country. And where delinquency did occur, the percentage loss to lenders was the lowest among the 50 states, again demonstrating conservative lending practices.

Having said that, there is evidence that Oregonians are high users of adjustable-rate mortgages and negative amortizing mortgages. According to the Realtors’ study, Portland area homeowners are more likely to take out adjustable mortgages than the nation as a whole, at 38 percent vs. 28 percent. And the First American study found Oregon had the fifth-highest adoption of negative amortization loans, at 9.1 percent vs. 7.3 percent nationally.

However, these borrowing practices reflect the high level of home equity experienced by most Oregon homeowners, as well as the high percentage of the elderly within the state. Given the cushion of the recent years of appreciation, many Oregonians feel comfortable taking equity out of their homes, whether to start a business, invest in financial assets, finance their child’s education, or use as income for retirement.

We should increase our efforts to educate consumers about the risks they take on with adjustable rate and interest only mortgages. However, we should also recognize that the creation of new types of mortgages has created significant homeownership and wealth-creation opportunities. People with less-than-perfect credit histories should not be barred from credit markets by ill-conceived policies. And we shouldn’t hype the problem with subprime mortgages by using unreliable and misleading information.

Gerard C.S. Mildner is the Director of the PSU Center for Real Estate and Associate Professor of Urban Studies and Planning at Portland State University.

SOURCES:
http://www.loanperformance.com/market_pulse/default.aspx
http://www.realtor.org/Research.nsf/files/06ORPortland.pdf/$FILE/06ORPortland.pdf
http://www.bizjournals.com/portland/stories/2007/07/09/daily38.html
http://www.bargain.com/news-09-06-2006.html