More leverage for investment properties

 Investment, Loan Guidelines  Comments Off on More leverage for investment properties
Oct 312016

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By G. Steven Bray

Since the financial collapse almost a decade ago, rental property buyers have been stuck with a minimum 20% down payment for conventional financing. Not only had Fannie Mae and Freddie Mac not forgotten about all the high-leverage loans they purchased that went bust, but the mortgage insurance companies also got burned. And for conventional financing, you need mortgage insurance to go higher than 80% leverage.

That has changed. Mortgage insurance companies have an appetite for rentals again. At this time for buyers with 680 or better credit, we’re able to accept a 15% down payment.

Of course, you’ll pay a premium for the mortgage insurance. Your MI rate would be roughly 50% higher than what one would pay when buying a primary residence. On a $200k loan, that equates to a monthly MI payment of about $102 assuming good credit. However, it only takes about 5 years to pay the loan down to 78% of the purchase price, at which point the mortgage insurance gets cancelled.

Rate update: Rates in a holding pattern again

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Rates in a holding pattern again
Oct 262016

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By G. Steven Bray

You can tell the European Central Bank is run by bureaucrats. Markets were expecting a straightforward answer on whether it will start to taper its asset purchases. Instead, we got a “not ready to tell you yet.” The market reaction was a muted sigh. On the one hand, it’s positive the ECB hasn’t decided to start tapering. However, punting the decision to another day just prolongs the anxiety.

It sounds like that other day will be the ECB meeting on Dec 8th at which time the head of the ECB has promised to let us know whether it has decided to continue or taper asset purchases. Interestingly, the Fed meets the week after that. It’s a good bet that if the ECB starts to taper, the Fed will raise short-term rates.

But that’s in the future, and remember that short term rates don’t dictate the medium-term direction of mortgage rates. What are rates going to do between now and then? Absent some extraordinary stimulus, I don’t think much. I think the market has a slight bias for higher rates at this time, but I bet 30y rates will stay well under 4% between now and the meetings.

Even so, upcoming events can cause volatility. The biggest economic news this week probably comes Fri with the Durable Goods and 3rd quarter GDP reports. A large departure from the expected 2.5%, plow horse growth could spook investors. Next week, the Fed meets. While no one expects it to change policy at this meeting because of its proximity to the election, the post-meeting statement could be interesting. The Fed used the statement at last year’s next to last meeting basically to announce it was raising rates in Dec. And, of course, the election is the following week, and there’s no telling how investors will react to the results.

Could spot condo approval return for FHA?

 Owner-occupied, Regulations, Residential Mortgage  Comments Off on Could spot condo approval return for FHA?
Oct 242016

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By G. Steven Bray

We talked a couple weeks ago about the changes FHA adopted to make it easier to get FHA financing for condos. Unfortunately, the changes are temporary, but FHA is trying to rectify that by proposing new regulations that take these changes a step further and make them permanent.

The biggest news is FHA is proposing the reinstate spot approvals for condos. Typically, a condo project must be FHA-certified for its units to be eligible for FHA financing. A spot approval allows a lender to seek approval for a single unit in an otherwise uncertified project.

Another proposed change that’s receiving mixed reviews would establish a range within which FHA could set the minimum percentage of units that must be owner-occupied. Currently, the minimum is 50%. The proposed range is 25% to 75%. FHA says this would give it flexibility to respond to market conditions. Congress has suggested 35% is appropriate, and the housing industry would prefer the certainty of the fixed, lower number.

FHA also is proposing to establish a range for the maximum commercial space within a mixed-use development. The current maximum is 50%. The proposed range is 25% to 60%.

You can find the proposed rule on HUD’s Web site,, and FHA invites your comments.

Rate update: Will ECB end the easy money bender?

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Will ECB end the easy money bender?
Oct 182016

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By G. Steven Bray

Interest rates continued their rise last week reaching the highest levels in 4 months. They’ve plateaued so far this week, but don’t assume the market has lost its steam. As I mentioned last week, I think concern about what the European Central Bank will say this week is powering this run.

The ECB will announce its policy decisions on Thurs. The world’s central banks have been fueling an easy money bender for the last few years. Rumors that the ECB was preparing to taper its asset purchase program sobered up markets in a hurry a couple weeks ago.

When the Fed began to taper its quantitative easing in 2013, mortgage rates moved up more than 1% and fairly quickly. It took a couple years before rates began to approach the same levels as before the tapering announcement. Using history as a guide, the threat for higher rates is definitely real. While actions of the ECB don’t directly affect mortgage rates, the assets they purchase are fungible, and US bonds will feel an impact.

With the scary stuff out of the way, let’s be clear that ECB tapering is not a foregone conclusion. The European economy is still weak, and the Brexit is still a huge unknown. If you’re willing to roll the dice, it’s quite possible the ECB will announce an extension of its program, which probably would push mortgage rates back to the levels seen earlier this month.

We have one more thing working for us. I suggested last week that you keep an eye on inflation reports. The two most recent readings were weaker than expected, which takes some of the pressure off rates.

Rate update: Empty punch bowl fears pushing rates up

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Empty punch bowl fears pushing rates up
Oct 112016

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By G. Steven Bray

As I said last week, it looks like market sentiment has swung towards rising interest rates. Despite last week’s mediocre jobs report, rates have risen each of the last 9 days. Fortunately, the pace of increase has been fairly moderate, but so far, the market shows no signs of a reversal.

It seems the source for our discomfort continues to be the private musings of the world’s central bankers. Will they continue to pump money into the economy, or are they finally worried about the distortions that’s causing? Rumors that the European Central Bank might slow down the printing press started this market reaction a couple weeks ago. The good news is that the ECB meets next week, and it could put the rumor to rest. That could stabilize rates, but I doubt the market will reverse unless the ECB does something truly unexpected.

One other area of concern is inflation. Inflation has been almost non-existent for the last few years, but given the statistical quirks of the measurement and given recently increasing energy prices, inflation may tick up a bit in the next few economic reports. While I’m not sure that’s really significant for the economy, it could give the Federal Reserve cover to hike short term interest rates. Personally, I think the Fed’s itching to raise rates if for no other reason than to give it some ammunition in case the economy turns sour. I think the hike will happen in Dec, but between now and then, rates will be under pressure in anticipation. The funny thing is, though, a Fed hike in Dec could very well lead to lower mortgage rates early next year.

Rate update: Is the party over?

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Is the party over?
Oct 062016

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By G. Steven Bray

The mood of the market has shifted. The last few months has been marked by complacency. Interest rates might have been bounced around a little by surprising events and economic data, but overall, rates never left a rather narrow range. That may be changing, at least for the short term.

The mood seems to be one of fear – fear that central bankers are going to take away the punch bowl. Since the economic collapse almost 10 years ago, central banks have been pumping money into the world economies. One way they’ve done this is by buying sovereign debt, like US Treasuries bonds.

A rumor has been circulating that the European Central Bank (ECB) is talking about tapering its bond-buying program. The ECB denied this, but the rumor has taken hold. When the Federal Reserve hinted it would stop buying new bonds in 2013, rate shot up, at least temporarily, in what was termed the taper tantrum. Shortly thereafter, the ECB expanded its bond-buying, and even though the ECB buys European bonds, the spill-over effect has helped keep US rates low the last three years.

As long as the rumor has legs, rates will remain under pressure. The situation is exacerbated by recent not-so-bad economic data worldwide. I’m afraid even a weak jobs report this Fri may not be enough to relieve the pressure. If you’re closing between now and the election, my vote favors locking.

FHA makes it easier to get a condo loan

 Loan Guidelines, Owner-occupied, Residential Mortgage  Comments Off on FHA makes it easier to get a condo loan
Oct 032016

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By G. Steven Bray

The FHA loan program once was a major source of financing for condo purchases, but due to regulatory changes, its volume dropped by almost 75%. The changes disqualified thousands of condo projects, and in turn limited the housing choices for first-time homebuyers and others with limited credit, a target market for the FHA program, and limited the pool of potential buyers for condo owners in those disqualified projects.

Well, it seems FHA may have seen the light. New rules FHA adopted this summer loosen up some of the more onerous restrictions. The two biggest changes affecting TX condos are:

– FHA agreed to include second homes that are not rentals in its calculation for owner-occupied units. A condo project qualifies for FHA financing only if at least 50% of the units are owner-occupied. This change could make a huge difference for projects in vacation areas.

– FHA also has simplified the recertification process that condos must go through every two years to remain approved. Some condo associations allowed their FHA approvals to lapse because the old process was so burdensome. Lenders often pursued the recertification process for the project because of a buyer’s interest in a condo, but imagine the number of potential buyers who didn’t apply because the project wasn’t already approved.

The new rules are only good for a year, but that gives FHA time to listen to feedback and enact permanent rules that don’t unfairly restrict lending for condos.