Jul 202019
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

The House Financial Services Committee recently passed two bills out of committee that could make FHA loans more attractive.

The first, The FHA Loan Affordability Act, would repeal the requirement that FHA borrowers pay mortgage insurance for the life of their loans. Mortgage insurance on conventional loans automatically ends when the loan balance is 78% of the original home value.

Mortgage insurance can considerably increase a homebuyer’s mortgage payment. On a $250k 30-year loan, mortgage insurance adds $180 to the monthly payment.

Despite the pain of never-ending mortgage insurance, this FHA requirement really has been more of an annoyance than an impediment for homebuyers who want to use an FHA loan. Home price appreciation often allows FHA borrowers to refinance into a conventional loan with no mortgage insurance within a few years of purchase, and perpetually low mortgage rates have made that an attractive option.

Interestingly, the wording of the bill appears to disallow appreciation as a means of achieving the requisite home equity to cancel mortgage insurance. Thus, homebuyers with strong credit still may favor conventional loans.

The second bill, The Housing Financial Literacy Act, would provide a 14% discount on the the upfront mortgage insurance for FHA borrowers who complete a homebuyer course prior to closing. On that $250k 30-year loan, the discount would save a homebuyer $625.

Both bills now go to the full House for consideration.

Jul 162019
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Following the surprisingly strong jobs report at the beginning of the month, mortgage rates have started edging up again – but without conviction. Rates are being affected by several factors right now, and those factors seem fairly balanced.

On the one hand, we have deteriorating economic conditions in Europe and China worrying investors of a global economic slowdown, which would push rates down. The Federal Reserve has acknowledged this ‘fear factor,’ which made markets very happy a couple weeks ago and supported lower rates.

On the other hand, US economic conditions remain healthy, as evidenced by the strong Jun jobs report earlier this month and today’s very strong retail sales report. On top of that, the inflation report last week came in a tad higher than expected, and inflation is the big enemy of low interest rates.

I expect rates to remain choppy and noncommittal until the end of the month when the Fed meets again. Based on Fed head Powell’s Congressional testimony last week, markets fully expect the Fed to cut short term rates by 25 bp at that meeting, so that action probably won’t move the needle. However, if the Fed fails to cut rates or cuts more than expected, watch out. And we’ll talk about those possibilities in the upcoming weeks.

Jul 032019
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

The interest rate rally has hit the pause button again, and all eyes appear to be on this Friday’s jobs report.

Rates really started rallying lower after the last jobs report missed expectations so badly. Investors immediately started predicting rate cuts by the Federal Reserve and questioning when the next recession would begin. The Fed acknowledged a potential slowdown at its Jun meeting and didn’t really dissuade the rate cut talk.

The market currently is pricing in a nearly 100% chance of the Fed cutting rates at its end-of-July meeting.

So, what happens if Friday’s jobs report isn’t awful – and what is awful? Well, markets are predicting about 160,000 jobs were created last month, so awful is probably a number below 100,000. Other recent economic data has shown slower growth, but still growth, so it’s quite possible that the Jun number was an outlier – or that it gets revised higher.

I think the Fed has a tricky job this time around. Other economies, in particular the European Union and China, appear to be in the early stages of contraction, and the trade war with China seems to have taken a bite out of the US economy. I suspect the Fed doesn’t want to be seen as caving to the markets, which really want to see a rate cut. However, if other economies slip into recession, and the Fed hasn’t done something to boost confidence, investors may pull back sharply and drag the US into recession, as well.

Should you lock or float? If you’re closing in Jul, and you’re risk averse, today is a good day to lock your rate. Rates are as low as they’ve been in a long time. They could get lower, but probably not much lower until after the Fed meeting. If you like to roll the dice, I think it would take a strong jobs report to send rates much higher. I think the more likely scenario is moderate job growth that leaves rates about where they’ve been for the last month.

Where to find down payment money

 Residential Mortgage  Comments Off on Where to find down payment money
Jun 032019
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Recent studies have shown that 30% to 40% of prospective homebuyers think they need a 20% down payment to buy a home. The prevalence of this myth makes the results of a recent Freddie Mac study even more interesting.

Freddie’s researchers looked at lender-reported data to the Consumer Financial Protection Bureau on homebuyers’ sources for down payment funds. The data covers a period from 2013 to 2016.

The results show homebuyers still overwhelming rely on their own money with 70% reportedly using savings, retirement funds, or inheritance money for their down payment. However, this is 9 points lower than in 2013.

Repeat buyers were more common in 2016 with 31% reporting they used proceeds from the sale of another property. This is 8 points higher than in 2013.

The share who used money from family or friends remained constant at 25%, but the share using grants or loans from non-profit or government agencies doubled to 10%. (Note that some homebuyers used multiple sources of funds, so the total percentage doesn’t add up to 100.)

One interesting result of the study was the percentage of homebuyers who used a co-borrower to purchase a home. Typically, a buyer uses a co-borrower to afford a more expensive home than the buyer could afford alone. The share for first-time homebuyers with co-borrowers rose from just over 1% before the Great Recession to over 4% in 2015 and 3.2% last year.

Rate update: Rates are heading lower

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Rates are heading lower
Jun 012019
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Interest rates have had an impressive rally the last couple weeks as investor sentiment has become decidedly dour. The rally began in earnest when the Chinese blew up the trade deal, but it’s taken on renewed life as talking heads have started tossing around the “R” word again.

Unfortunately for economic growth, now they have something on which to hang their hats. While employment growth and consumer sentiment still appear strong, some economic activity indicators are pulling back.

This may be a manifestation of the trade war, which means it could reverse if negotiators are able to craft a deal soon. However, other economies, particularly those of China and Germany, are slowing even more quickly. We may already be past the point of no return in terms of the next recession overseas.

So, what does this mean for mortgage rates? If you like lower rates, it’s all positive. It’s quite likely we haven’t seen the lowest rates of the year yet.

That said, it may take a while before that happens. It’s long-term Treasury rates, which readily respond to economic conditions, that have fallen so much recently. Mortgage rates are lagging behind for reasons that aren’t likely to change soon.

Even so, investor sentiment is such that traders may ignore a positive economic report, such as next week’s jobs report, and keep rates in their current, lower range, and over time, mortgage rates will catch up.

Rate update: The trade war blues

 Interest Rates, Residential Mortgage  Comments Off on Rate update: The trade war blues
May 212019
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Mortgage rates have moved very little this month, and it still seems like their next move is tied to the trade war. The announcement of new tariffs on Chinese goods created a nice little rally that brought rates down close to their lows for the year. But lately, it seems like every negative headline has been met with a conciliatory one, which has kept rates stable.

There is other news out there, and absent the trade headlines, it might move rates. Probably the most significant is the action in the Middle East. A new fighting war would roil markets everywhere and lead to lower rates.

Europe also has current crises of note. Great Britain still has a Brexit problem – deciding how it’s going to leave the European Union. Italy, on the other hand, just thumbed its nose at European Union austerity rules, and pundits once again are talking about the survivability of the EU.

In the US, we’re watching for economic data that indicates something other than a steady as she goes economy. The next big reports aren’t due for a couple weeks, culminating in the May jobs report due on Jun 7th. Analysts aren’t predicting any surprises based on recent economic activity.

And that brings us back to the trade war. Barring something extraordinary happening elsewhere in the world, I think the fate of interest rates depends on the success or failure of trade talks. Resolution would remove the biggest uncertainty for the economy and almost certainly would lead to higher rates.

Renters twice as cost burdened as homeowners

 Residential Mortgage  Comments Off on Renters twice as cost burdened as homeowners
May 082019
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

With all the ink spent on affordability in the last year, I found a recent study by Corelogic provided some novel insights. It found that housing costs in Austin for renters rose almost twice as fast as those for homeowners.

The study period was Dec 2005 to Dec 2018, so it roughly covers one full economic cycle. Corelogic compared its rental index, which analyzes the same rental properties over time, to a “typical mortgage payment,” which it calculates assuming a 30-year fixed mortgage with a 20% down payment.

In Austin, the rental index rose more than 60% over the study period while the typical mortgage payment rose about 35%. The difference between the two in Dallas and Houston wasn’t as large, but the rental index still rose faster. A part of this difference is attributable to the fact that mortgage rates in 2005 were a point and a half higher than they were last Dec.

And this reinforces another interesting point highlighted by Corelogic. Renters are almost twice as likely to be “cost burdened,” meaning 30% or more of their income goes towards housing expenses. Forty-six percent of renters were cost-burdened in 2017 as opposed to about 27% of homeowners. Moreover, the share is down 10 points for homeowners in the last 10 years whereas it’s held steady for renters. This highlights the fact that homeowners can leverage the market through refinancing to lower their housing costs whereas renters’ only recourse is to move to a less expensive (and probably lower quality) rental.

Here is a link to the study results.

Rate update: Trade war is our headliner again

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Trade war is our headliner again
May 072019
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Last week’s two big ticket items, the Federal Reserve meeting and the jobs report, lived up to their billing. The Fed didn’t change policy, nor did the post-meeting announcement really make any waves. It was Fed head Powell, at his post-meeting press conference, who got things moving. He acknowledged that foreign economies look a little stronger than earlier in the year and was equivocal when asked whether the next rate move would be a cut or a hike. (Investors have been hoping for a cut.) Interest rates quickly bounced higher.

Then, we got the jobs report on Fri. The headline numbers were great: a solid beat on jobs created and the lowest unemployment rate in 50 years. However, wage growth was tepid, reinforcing concerns about falling inflation (which tends to depress rates). On top of that, the services sector report missed expectations. Interest rates edged down again, and it looked like we’d be riding the range a while longer.

This week set up to be rather quiet until Friday’s inflation report – until the Chinese pulled away from trade negotiations. Markets have been hopeful for a trade deal, so the president’s threat to impose new tariffs created waves of uncertainty. Investors responded to that by buying bonds, which pushed rates down.

So, where do we go from here? Given that multiple recent economic reports have agreed about receding inflation, it’s unlikely Friday’s Consumer Price Index is going to have much effect on rates. If the index surprisingly doesn’t agree with the other reports, rates may tick up a bit.

However, I suspect rates will rise or fall based on the trade talks. A further breakdown is bound to make investors nervous about a full blown trade war, leading to lower rates.

FHA crack down on down payment assistance

 Loan Guidelines, Residential Mortgage  Comments Off on FHA crack down on down payment assistance
Apr 292019
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

One of a myriad of causes of the housing collapse during the Great Recession was the absence of “skin-in-the-game.” Borrowers used no-money down loans to purchase homes, then walked away from those homes when the economy went sour. Given that they had put none of their savings into the homes, walking away was easier.

One way to achieve no-money down during that time was to use seller-provided down payment assistance with an FHA loan. The seller provided the necessary 3.5% down payment and usually boosted the home’s sale price a little to make up for it. Congress outlawed this practice in 2008, mandating that no party with a financial interest in the home sale – including the seller, the agents, and the lender – could provide the homebuyer’s down payment funds. However, the law allowed governmental programs to continue providing down payment assistance.

Well, where there’s a will, there’s a way, and an entrepreneurial fellow in UT partnered with the Paiutes tribal government to create a fund, the Chenoa Fund, that lenders could use for down payment assistance. Whereas government down payment programs target homebuyers in the governmental jurisdictions, the Chenoa Fund was available nationwide, and it made a profit on the transactions.

Borrowers in down payment assistance programs become delinquent about twice as often as those who use their own funds, and the Feds see these programs as an increasing risk to the FHA Mutual Mortgage Insurance Fund, which backstops FHA mortgages.

Last week, HUD published new guidelines that clarify which entities can provide down payment assistance. The guidelines seem to target the Chenoa Fund, and it will be interesting to see how it responds.

But that still leaves the bigger issue of higher default rates for down payment assisted loans unaddressed. Many of these programs offer the assistance in exchange for higher-than-market interest rates, which stretch a homebuyer’s ability to repay the mortgage. In addition, they perpetuate the problem Congress thought it had addressed in 2008 – homeowners with no skin in the game.

FHA changes aim to deny riskier borrowers

 Loan Guidelines, Residential Mortgage  Comments Off on FHA changes aim to deny riskier borrowers
Apr 272019
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Late last month, FHA made some changes to its automated underwriting system that may prevent as many as 50,000 potential borrowers from qualifying for an FHA loan. FHA said the changes are meant to limit exposure of its insurance fund from higher risk situations.

According to the agency’s annual report to Congress, it’s seeing a concentration of mortgages with high debt-to-income ratios and low credit scores. It also reported a 60% increase in cash-out refinances. (This isn’t an issue in TX as TX homeowners cannot take cash out using an FHA loan.)

An FHA official told The Wall Street Journal that the system changes will affect 40,000 to 50,000 loans each year, which is 4 to 5% of all loans FHA insures.

The changes will flag loans with a combination of higher debt-to-income ratios and lower credit scores for “manual underwriting,” which means underwriting performed by a human being. Unfortunately for borrowers, manual underwriting also means more stringent loan guidelines, and many of those who qualified before the system changes no longer will qualify.