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.
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
From the “I heard it so it must be true” file, I was under the impression that Oregon mortgage rates were usually lower than the national average. I did a search on www.bankrate.com for a 30 year mortgage, zero points, 20% down. I used the APR as the rate as that should allow for the most equal comparison of loans (correct me if I am wrong).
Portland: 6.148%
NYC, NY: 6.241%
San Diego: 6.148%
Dallas, TX: 6.148%
So we can probably consider this myth “Busted.”
All the 6.148% loans are through American Interbanc Mortgage, LLC. Equally interesting is their bold print homepage:
NOTICE TO OUR COMPETITORS:
I found this article on subprime lending interesting. It defines a lot of the terms that we hear. Note that the link at the bottom of the article discloses his relationship with the lending industry. There are also more definitions there.
In a different news article on subprime, AIG has agreed with regulators to talk to their clients regarding the loans they received from the bank. Washington Mutual has already had a similar conversation with the Feds. Also in the article:
Earlier this week, Federal Reserve Board Chairman Ben Bernanke said the Fed will meet with mortgage lenders and consumer advocates on Thursday to discuss whether so-called low-doc or no-doc loans marketed to subprime borrowers should be prohibited.
The changes in the subprime market have not done away with below 20% down financing. The restrictions (lender imposed) on them have made them less common.
This is a very common trick used by a large majority of lenders and brokers out there. Instead of being straight-forward, and saying "Mr/Mrs Borrower, I am charging you 1% of your loan amount as an Origination Fee", they will try and hide their profits from you by breaking them into "junk fees".
They give them cute names, like "broker fee", "application fee", "administration fee", "processing fee" and so on. Don’t get me wrong, sometimes some of these fees are valid. You can almost always expect a reasonable processing fee on your loan. However, I have heard people brag about how their broker didn’t charge them any "points or loan origination fees" on their loan, but when I looked at their Good Faith Estimate, I could see why. The lender was making $4,700 on miscellaneous junk fees!
Keep your eyes open for excessive fees, read the entire Good Faith Estimate, and ask your broker or lender to explain where the money is going so you can know if you are being charged the norm, or if they are trying to suck every last cent out of you in a very devious manner.
Shawn Headlee
Columbia Mortgage
sheadlee@cmortgage.net
Mortgage rates around the country fell this week, with rates on 30-year mortgages sinking to their lowest level in 10 months.
Freddie Mac, the mortgage company, reported Wednesday that 30-year, fixed-rate mortgages averaged 6.18 percent for the week ending Nov. 22. That’s down from 6.24 percent last week and was the lowest rate since the week ending Jan. 26, when 30-year mortgage rates averaged 6.12 percent. Locally rates have been bouncing between 5.625% and 5.75% for a 30 year fixed mortgage with one discount point. Typically you have to drop your rate 1% to make it worthwhile to refinance.
It marked the second week in a row that mortgage rates dropped, a development that economists attributed to easing inflation pressures. Inflation is calming down amid stabilizing energy prices, slower overall economic activity and the housing slump.
SHAWN HEADLEE
Senior Loan Officer
Phone/Pager – 503-906-1353
Columbia Mortgage, LLC.
Fax – 503-526-2847
The whole country has enjoyed years of historically low interest rates. That’s been great for real estate and even better for Portland real estate. Market factors have typically allowed Portlanders to get lower interest rates than the national average.
For the first time in 18 meetings, the Federal Reserve held interest rates at their current level. The rise of rates has a much bigger impact on short term loans. In real estate, this means Home Equity Lines of credit (HELOCs) feel the brunt of each Fed hike. Long term rates (30 year mortgages) are not as substantial to the hikes which mean we have seen adjustable rate mortgages increase faster than fixed and they are no longer the great bargain they once were.
No two people have the same mortgage requirements so talking to a competent mortgage broker is your best bet.
Inevitably, I field this question during just about every loan application, backyard BBQ, and even in my dreams.
So what’s the buzz around “Interest-only” loans? Are they good? Bad? Are they going to cause the “real estate bubble” to pop?
The answer is……it depends. Let’s take a closer look at what interest-only loans are.
Under traditional programs a borrower’s monthly payment remains fixed. A portion of that payment is applied to the interest charge determined by the remaining balance and interest rate. The rest of the payment is applied to paying back the loan. Over time, the proportion of each payment that goes towards paying back the principal increases.
With interest-only payment programs a borrower is only required to pay the interest portion of the monthly payment. This keeps the monthly payment lower but delays repayment of the loan.
To compare, lets evaluate two brothers who take out a $200,000 loan at 6.00% on a 30 year loan. Brother A decides to take out a traditional principal and interest mortgage. Brother B takes out an interest-only loan.
After 36 months, brother A has made $43,168 in total payments and owes $192,168 on his original mortgage.
Brother B, who took out an interest-only mortgage has made $36,000 in payments($7,168 less than brother A) and still owes $200,000 on his loan ($7,832 more than brother A).
At initial glance one may say that brother A is $664 better off than his brother.
However, this may not be the case. Let’s say that brother B had taken his $199 savings per month and invested it in a liquid asset that earned an annualized return of 7.00% over those three years. In that case, brother B would have a liquid investment account worth $7,946 after 36 months.
At this point brother B would be better off by $114. Now lets say that brother A and B both lose their job and their ability to pay their mortgage. Unless brother A had other savings he may have a difficult time paying his mortgage. Brother b however has a liquid asset account that he could use to pay his mortgage for ay least 6 months.
The bottom line is that there are very real risks associated with interest-only loans. However, when used properly, interest-only loans offer borrowers a tool which can increase liquidity and security.
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