Moving mortgaged rental property to LLC is okay

 Investment, Loan Guidelines  Comments Off on Moving mortgaged rental property to LLC is okay
Jan 292018

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By G. Steven Bray

Investors in residential real estate have long been dogged by the “due on sale” clause in the standard promissory note. It states that the lender may call the note due upon the sale or transfer of ownership of the property. A preferred vehicle for ownership of investment properties is a limited liability company because it provides some legal separation between the property and the investor’s other assets.

Fannie Mae requires that a borrower be personally liable on a note, meaning the borrower must sign the note in his/her name. Fannie won’t allow the name on the property’s title to be different from the name on the note, so investors sometimes quit claim the property title to their LLC after closing. However, this could trigger the due on sale clause if the loan servicer chooses to enforce it.

I have great news! Late last year, Fannie changed its servicing guidelines so that a change of ownership to an LLC in which the borrower owns a majority interest is acceptable and does NOT violate the terms of the note.

A couple important caveats:

– The change applies only to loans purchased by Fannie after 6/1/16; and

– The title must revert to the borrower prior to refinancing.

Fannie still will not allow the LLC to sign the note, and it still requires the property’s title to match the borrower’s name. However, Fannie will allow the time the property was held in the LLC to count towards the 6-month seasoning period for a cash-out refinance.

I did check with Freddie Mac, and it has not followed Fannie’s lead on this issue.

Rate update: Pick a bail-out point

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Pick a bail-out point
Jan 232018

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By G. Steven Bray

Mortgage rates are the highest they’ve been in about 9 months. That sounds alarming until you remember that we’re still only a percentage point away from the all-time low 30y rate. However, given that rates have been so low for so long, it’s rational to wonder if we’ve seen the end of historically low rates.

First, let’s look again at what seems to be driving the rate increase. The biggest source of inspiration is expectations – expectations for inflation and economic growth. Expectations influence the actions of bond investors. Those expectations started shifting last fall and became more positive with passage of tax reform. Markets expect US growth to accelerate this year, and given labor market conditions and recent corporate announcements of higher employee pay, it’s reasonable to conclude inflation may shift higher. As we know, inflation is the mortal enemy of low interest rates.

Rates also respond to supply and demand. As part of its quantitative easing program, the Federal Reserve has been the biggest buyer of mortgage bonds. Last fall, the Fed announced it would start tapering those purchases. It could take higher rates to entice other buyers to pick up the supply the Fed was buying.

All this makes it sound like higher rates are inevitable, and for the short term, that may be true. However, the Fed still is befuddled why inflation has been subdued for so long. A couple factors that have kept a lid on inflation, falling commodity prices and concerns about the global economy, could push rates lower again.

So, what to do if you need to lock your mortgage rate? Even when rates are in an uptrend, we often see temporary dips that are good locking opportunities, and we saw one today. Take advantage of a dip if you can, but pick your bail out point. If rates hit it, lock and cut your losses. I’m concerned that if rates start rising again this week, they won’t stop until they’re 1/4% to 3/8% higher.

Equifax data breach prompts Fannie to change guidelines

 Loan Guidelines, Residential Mortgage  Comments Off on Equifax data breach prompts Fannie to change guidelines
Jan 202018

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By G. Steven Bray

The recent Equifax data breach affected millions of consumers. One of the remedies suggested by cybersecurity experts was for consumers to freeze their credit files with Equifax. The credit bureau made it easy for consumers to initiate the freeze, so many followed the advice.

Unfortunately, cybersecurity experts aren’t mortgage experts, so they didn’t realize the potential ramifications of freezing one’s credit. Mortgage guidelines require a lender to obtain credit information from all three major credit bureaus. If credit has been frozen, the applicant must unfreeze the file before the lender can approve the loan.

Fannie Mae recognized the potentially significant impact of this situation and changed its guidelines. For now, if a borrower’s credit file is frozen at one credit bureau, a lender can proceed as long as credit data is available from the other two bureaus and at least one of them reports a score.

Rising home prices lead to higher loan limits

 Loan Guidelines, Residential Mortgage  Comments Off on Rising home prices lead to higher loan limits
Jan 172018

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By G. Steven Bray

Rising home prices have prompted regulators to increase loan limits for standard loan programs. Fannie Mae and Freddie Mac raised the limit for their conventional, conforming loans by almost 7% to $453,100. This limit applies to all areas of TX and is in effect now.

FHA also raised its loan limit, but the limit varies by county. FHA sets the limit to 115% of the median home price in an area with a ceiling of $679,650 and a floor of $294,515. The floor applies to areas where 115% of the median home price does not reach that level.

TX home prices haven’t reached levels at which the ceiling would apply; however, four TX metros do have a limit greater than the floor. Austin’s limit rose $23k to $384,100 for a single-family home. The DFW limit rose about the same amount to $386,400, still the highest in the state. San Antonio’s limit rose by the greatest amount, over $32k, to $359,950. Houston, still recovering from the oil industry downturn, didn’t see any change, with the limit remaining $331,200. Remember that these limits apply to all the counties in the metro, not just the cities themselves.

The limit for the VA program mirrors the Fannie/Freddie limit at $453,100. USDA programs shouldn’t be affected because loan size is driven by annual income limits, not median home prices.

These limits apply to single-family homes. Higher limits apply for two- to four-unit properties.

Rate update: Why rates are heading higher

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Why rates are heading higher
Jan 162018

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By G. Steven Bray

Last week, I mentioned inflation being the underlying force behind mortgage rate increases. Last Fri’s Consumer Price Index release and a review of inflation expectations seem to confirm that.

The CPI ticked 0.1% higher in Dec, which matched expectations. That allowed the headline year-over-year rate to fall from 2.2% to 2.1%. However, the core rate, which strips out the volatile food and energy components, rose 0.3%, which was higher than expected, making the year-over-year increase 1.8%. This uptick in the core rate was unsettling and sparked a bit of bond selling, which pushed rates higher.

Inflation expectations, on the other hand, have remained well above 2% for quite a while even though actual inflation has rarely reached that level. Investors haven’t been accounting for those expectations until very recently as is reflected in inflation-adjusted bond prices.

I suspect the change in attitude is due to a number of factors. Markets aren’t sure what to expect from the incoming Fed chair. Will he wait to see whether the tax cuts accelerate the economy, or will he raise rates more aggressively to try to keep a lid on things? Certainly the tax cuts have raised consumer and investor sentiment, which suggests increased economic activity. In addition, oil prices have been a tear of late. Higher oil prices sparking higher overall inflation wouldn’t be a first.

While I’m not convinced we’ve seen the end of historically low mortgage rates, I do think we’re going to experience a period when the forces pushing rates up exceed those pushing down absent some unexpected event. For now, locking if rates dip for a day or two just makes sense.

The government wants to know your credit score

 Credit Scoring, Regulations, Residential Mortgage  Comments Off on The government wants to know your credit score
Jan 122018

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By G. Steven Bray

If you’ve applied for a mortgage recently, you may remember the government monitoring section of the application. The government asks you to identify your sex, race, and ethnicity so it can watch for patterns of unfair lending.

However, it seems the data the government was collecting didn’t provide enough granularity. The data might show more members of a minority group were denied loans, but it provided few insights into the disparity.

The solution – collect more data. Starting in 2018, lenders are required to report more invasive information for every loan applicant, including your credit score and debt-to-income ratio. In addition, lenders must report property values.

The stated goal of this data collection is to ensure fair lending, but it is a bit disconcerting. The CFPB insists the data is anonymized so that individual borrowers cannot be identified. However, privacy advocates worry that the expanded information collection gives nefarious actors enough hints to disaggregate the data. In addition, the data will be housed on government computer systems that have a history of being hacked.

As a consumer, you have no choice whether lenders collect and report the expanded data when you apply for a loan. Your only choice is whether you choose to identify your sex, race, and ethnicity, but that doesn’t stop the lender from reporting your other private financial data.

Rate update: Looking for signs of inflation

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Looking for signs of inflation
Jan 092018

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By G. Steven Bray

Mortgage rates have bounced up slightly since passage of the tax reform bill. While it’s not clear this was the cause, it’s evident tax reform has boosted sentiment as evidenced in the soaring stock market indices. What does that mean for rates going forward?

If tax reform was the only thing on market investors’ minds, it’s likely we wouldn’t be talking about a slight increase in rates. Notice that short-term interest rates have risen much more than long-term rates, resulting in a flattening Treasury yield curve. Something is keeping a lid on longer-term rates.

I suspect that something is inflation, which continues to post numbers below the Federal Reserve target of 2%. Markets watch several inflation measures, and all have been tame. The Fed’s favored measure, the PCE, remained at 1.5% last month. Wage inflation, as reported in last week’s jobs report, hit expectations at 2.5% after a downward revision to the previous month’s number. Consumer expectations for inflation remain historically low.

This week, we get what is probably the market’s favorite measure, the Consumer Price Index. While it has quirks that make it less valued by the Fed, it has great historical significance. The core CPI dropped back below 2% about a year ago and has been without a pulse since then. Should Friday’s report show that inflation ticked up, even by a modest amount, I expect rates to bounce higher again. If inflation remains dead, the bond market probably will continue to drift, looking for some other source of inspiration.

Two troublesome quirks in the new TX home equity rules

 Loan Guidelines, Owner-occupied, Residential Mortgage  Comments Off on Two troublesome quirks in the new TX home equity rules
Jan 042018

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By G. Steven Bray

As we discussed last year, Texans changed the rules for homeowners who want to take equity out of their homes. TX Equity loans, what we call cash out loans, are a special type of conventional loan because the TX constitution provides homeowners some unique protections. As a result, the loans have slightly higher interest rates and higher closing costs than other conventional loans.

The changes approved by voters last fall mainly benefited homeowners with lower-priced homes and homeowners in rural areas. However, attorneys, as they’re apt to do, have noticed a couple quirks in the wording that could cause problems.

– The rules now allow a lender to charge closing costs equal to 2% of the loan amount, down from the previous limit of 3%. However, this amount now excludes the appraisal and survey fees and a fee for a title policy and policy endorsements established in accordance with state law. It’s the “in accordance with state law” part that is at issue. Our attorneys are recommending a conservative reading, which could add a few hundred dollars back to the total subject to the 2% limit.

– The rules also now allow homeowners on ag-exempt land to take out home equity loans. The issue is the state tax code says an ag-exemption is not allowed on land that secures an equity loan. While this likely was an oversight, and the Comptroller may correct the problem soon, the risk for homeowners is that they’ll lose their ag-exemption. That raises the horror of property tax rollbacks.

Even with the issues, the changes are a welcome relief for homeowners wanting to use their home equity, and in time I suspect the state will resolve the issues in the favor of homeowners.

It’s all about the tax bill

 Interest Rates, Residential Mortgage  Comments Off on It’s all about the tax bill
Dec 042017

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By G. Steven Bray

For the direction of mortgage rates, it’s mostly about the tax reform bill. When passage of the Senate version looked imminent, rates jumped up to the highest levels in a month. As we discussed last time, markets equate tax cuts with higher growth and potentially higher inflation, which correlate with higher interest rates.

It appears it will take a couple weeks for the House and Senate to reconcile their plans, and during that time, I don’t expect a lot of rate movement, absent a bombshell headline, even though this Fri we have the Nov jobs report and next week a Federal Reserve meeting. These are usually top tier events attracting the careful attention of investors. However, this month they’re liable to cause nary a stir.

The jobs report hasn’t seen much reaction from markets in months. It continues to show the economy plugging along. It would have to miss expectations badly to turn heads.

The Fed meeting has more potential because of the post meeting commentary. Markets are pricing in a nearly 100% chance of a rate hike, but investors think the tax cuts can negate any drag on the economy from higher rates. However, the commentary could shed more light on the Fed’s future plans or its thinking on inflation trends, either of which could move the market.

Will your credit score rise with new FICO model?

 Credit Scoring  Comments Off on Will your credit score rise with new FICO model?
Dec 012017

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By G. Steven Bray

The recent hacking of Equifax data has brought the credit bureaus into the headlines again. While the credit bureaus don’t control the FICO scoring model, the most popular model and the one the mortgage industry uses, the spotlight seems to have brought renewed attention to the fairness of credit scoring.

Yesterday, we discussed how FICO 4, the current model of choice in the mortgage industry, doesn’t seem to align with current credit risk factors. Congress is trying to force the industry to consider newer credit scoring models. So, let’s look at the potentially negative effects of the newer models. There will be winners and losers, and some of the losers may be surprised.

The current model rewards consumers who make on-time minimum payments on all their credit accounts. The account balance only seems to matter if the consumer allows it to exceed 30% of the available credit.

The newer models look at this a little differently. They reward consumers who make larger than minimum payments. They also penalize consumers who have large, unused available credit as that is credit that they suddenly could decide to use.

It may be years before any of these changes affect your ability to qualify for a mortgage. However, you are likely to start seeing them when you apply to other types of credit.