Bulls & Blogs

A half million dollar home loan with a low down payment

Loan Guidelines, Residential Mortgage Comments Off

Dec 062019

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

By G. Steven Bray

Congress tasked the Federal Housing Finance Agency (FHFA) each year to reset conforming loan limits based on the change in the average U.S. home price for that year. FHFA reported that home prices rose 5.38% last year, so accordingly, it increased the loan limit by the same amount to $510,400 for a single-family home.

A conforming loan is one eligible for purchase by Fannie Mae and Freddie Mac, the two government behemoths that control most of the home loan market. Except for government loan programs, Fannie and Freddie programs offer the best combination of low interest rates and low down payment requirements. For both the minimum down payment is 3%; thus, it’s now possible to purchase a half million dollar home with a $15,000 down payment.

Higher loan limits apply in certain “high cost” areas where 115% of the local median home price exceeds the new limit; however, FHFA hasn’t identified any of those “high cost” areas in TX. Higher limits also apply to two, three, and four unit properties.

Tracking the rising loan limit over the last few years gives a good sense of how quickly home prices have been rising. In 2017 the single-family loan limit first rose from its Congressionally-mandated value of $417,000. In three years, the limit has risen 22%.

The new limits are effective for loans that close starting Jan 1st, which means they will apply for homebuyers who are shopping for a new home now (assuming a normal 30-day closing).

FHA sets its loan limit independently of Fannie and Freddie, and I’ll report on it next week.

Rate update: All I want for Christmas is a trade deal

Interest Rates, Residential Mortgage Comments Off

Dec 042019

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

By G. Steven Bray

I hope you and your family had a blessed Thanksgiving. It was a fairly uneventful one for bond markets with interest rates sticking to their recent range. In fact, rates have been stuck in this range since Sep. Sure, rates move a little week to week in response to headlines and economic data, but I still think the next trend for rates ultimately depends on a trade deal with China, an imminent resolution to which is looking increasingly unlikely.

The main wildcard at this time is the global economy. Earlier in the year, rates dipped invitingly based on weak economic data coming out of Europe and China. There was great concern that the US economy would follow suit. Instead, the US economy, except for manufacturing, showed resillence and even robustness in sectors such as housing. Europe and China now seem to be bottoming out, and some analysts are predicting renewed global growth next year.

As we’ve discussed many times, a growing economy tends to push up interest rates, so that’s the background through which we have to consider our current situation. A trade deal, even a partial one, is likely to foster renewed optimism and, in turn, economic growth. On the other hand, should the trade dispute deepen, it’s likely the hand-wringing and talk of recession will start again. While that’s good for lower interest rates, we risk talking ourselves into a recession regardless of the strength of our economy.

Rate update: Two reasons interest rates will remain flat this week

Interest Rates, Residential Mortgage Comments Off

Nov 122019

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

By G. Steven Bray

I’ve been writing for months about my concern about the Chinese trade dispute and its potential to move interest rates. Last week presented a poster child case for my concern. Rumors circulated that the US would rescind some tariffs and forego the planned Dec tariffs to induce the Chinese to sign phase one of a trade deal. Bond traders reacted swiftly to push rates to their highest levels in 3 months. Remember that resolving the trade dispute is considered good for the economy, and a healthy economy supports higher interest rates.

As we start this week, it looks like markets may be taking a breather. President Trump wouldn’t confirm the tariff rumors, and most of the other issues that had been weighing on rates – slowing world economies, Brexit, the impeachment battle – are far from settled. So, hitting pause makes sense while markets wait for a new source of inspiration.

I doubt we’ll get it this week, but we will have a couple candidates:

We’ll get two heavy-weight economic reports this week: the Consumer Price Index (CPI) measuring inflation and the Retail Sales Report. Inflation has remained muted this year, and few, including the Fed, expect that to change. Retail sales, an indicator of the consumer side of the economy, have remained solid despite the trade dispute, and most expect that to continue. If either report deviates significantly from expectations, expect interest rates to move accordingly.
Second, Fed head Powell has two days of Congressional testimony this week. Given that Powell had a press conference following the Fed’s meeting two weeks ago, I don’t expect he’ll reveal anything during his testimony that will move rates. However, markets will be vigilant just in case.

More info on FHA condo rules

Loan Guidelines, Residential Mortgage Comments Off

Oct 212019

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

By G. Steven Bray

I reported last week on the new FHA rules for approving a single condo unit in an otherwise ineligible complex, FHA’s replacement for the old spot approvals. At the time, I didn’t have many specifics. Now I do, so let’s look at what it takes to get a single-unit approval.

FHA considers the following characteristics for single-unit approvals:

At least 50% of the units in the complex must be owner-occupied, which includes second-homes that aren’t rented the majority of the year;
The HOA must have a 10% reserve account;
No more than 10% of the units may be owned by one person or entity;
The complex may be comprised of no more than 35% commercial space; and
No more than 15% of the units may be 60 days or more past due on their HOA dues.

And the really great thing is documentation of these characteristics generally is part of the standard buyer’s package the HOA provides to prospective buyers. With a single-unit approval, it’s the lender’s responsibility to make sure the complex complies with the rules, so the HOA doesn’t have to slog through FHA’s bureaucratic approval process.

Condos that receive single-unit approval are eligible for the same low down-payment options as other FHA loans, meaning a minimum down payment of 3.5%. The only exception to this is if the buyer’s financial situation is such that the lender cannot get an automated approval, in which case the buyer must make a 10% down payment.

Single-unit approvals really shouldn’t significantly affect the amount of time needed to close an FHA loan. FHA has a special process for registering spot-approval loans that may take up to 3 days. (Registration for other FHA loans typically is instantaneous.) However, this registration process is during the time when the buyer typically is gathering financial documents. Once FHA issues the “case number,” it’s the lender’s responsibility to make sure the condo qualifies.

FHA makes it easier to buy a condo

Loan Guidelines, Residential Mortgage Comments Off

Oct 122019

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

By G. Steven Bray

Currently, in order for a homebuyer to use an FHA loan to purchase a condo, the condominium project is subject to an approval process. The process is rather bureaucratic and takes time, AND it must be repeated every two years. Condo developers may muddle through the process to get units sold initially, but it seems few renew their approvals once the condo project is complete. If the project doesn’t have a current approval, a homebuyer may not use an FHA loan to purchase a unit in that project.

Many years ago, FHA would approve a single-unit in an otherwise illegible condo project – so called “spot approvals” – but FHA eliminated that option after the financial crisis.

I guess it’s a case of deja vu all over again because spot approvals are back. Apparently, the feds have realized that preventing FHA homebuyers from considering condos was exacerbating the housing inventory problem.

The new single-unit approval guidelines have a few limitations:

the condo project can’t have ineligible characteristics, like a rental desk;
the project must consist of at least 5 units;
it must be occupied or have been issued a certificate of occupancy for at least one year; and
no more than 10% of the units can have single-unit approvals.

The new guidelines go into effect on the 15th, so start shopping.

Rate update: My biggest fear

Interest Rates, Residential Mortgage Comments Off

Oct 092019

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

By G. Steven Bray

Mortgage rates seem to be range-bound once more. After the decidedly weak manufacturing and services sector reports last week, that may be a bit of a surprise. The talking heads predictably spouted doom and gloom scenarios of a pending recession, but it seems like investors weren’t listening very closely. Rates initially retreated on the headlines, but since then have held steady.

So, what is likely to be the next source of inspiration for rates?

I think the most important economic data to watch at this point are the confidence measures. Business confidence has been lagging most of the year due to the ongoing trade dispute with China. However, consumer confidence has been sky high. That may be changing – possibly due to uncertainty created by the impeachment drama or the constant downbeat news from the press or maybe something else. My biggest fear is that we talk ourselves into a recession.

If consumers pull back, the economy could erode quickly, which would lead to much lower rates as we close the year. Given the political considerations – election next year – I suspect political operatives will do what they can to encourage that erosion. Thus, I put higher odds on lower rates before the end of the year.

I think the most important economic issue still is the trade dispute with China. Earlier in the year, I was betting on at least a partial resolution, which I said would lead to higher rates. However, given our current political dysfunction, I doubt China will want to deal. We may see a temporary reprieve from some of the sanctions, which could tickle rates higher for a short time, but I expect the dispute will continue to dampen both domestic and global growth, which would keep a lid on interest rates.

Get rid of the 30-year mortgage

Residential Mortgage Comments Off

Sep 252019

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

By G. Steven Bray

Get rid of the 30-year mortgage? So says Ed Pinto, a resident fellow and the co-director of the Center on Housing Markets and Finance at the American Enterprise Institute (AEI). In a recently posted article, Mr. Pinto argues that a 30-year term greatly increases the risk of foreclosure and has led to higher home prices for entry-level homes.

He cites statistics showing that foreclosure rates were almost zero during the 1950’s (prior to the advent of the 30-year mortgage) and that a 30-year loan is about twice as risky as a 20-year loan. He also notes that in the 50’s the median price of a home was roughly two-times median income. Today, the ratio is over 3.5.

Mr. Pinto’s arguments are thought-provoking, but I’m not sure the proposal, elimination of the 30-year mortgage, is reasonable. A 30-year term results in a lower monthly payment, making it possible for someone to purchase a higher-priced home than if she used a 20-year mortgage.

The issue of risk in my mind comes down to a question of public policy.

If 30-year loan rates reflect the higher associated risk of foreclosure, should that be acceptable?
If as a society we’re not willing to accept any risk of foreclosure, then are we willing to accept a higher interest rate (or government subsidy) to internalize the costs associated with supporting those who lose their homes?

Finally, Mr. Pinto argues that the 30-year mortgage has made entry-level homes less affordable. I’m not buying his correlation. While it makes economic sense that a lower monthly payment would lead to more demand for homes pushing prices up, the market would correct for that by creating supply to meet the demand. Moreover, there are too many other factors that could explain the fact that entry-level home prices have increased more quickly than move-up home prices, such as mortgage programs that target and subsidize first-time homebuyers.

Rate update: Reasons rate should be lower

Interest Rates, Residential Mortgage Comments Off

Sep 162019

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

By G. Steven Bray

What a difference a couple weeks make. Last week, the press was reporting the lowest mortgage rates since 2016. This week? Well, we lost a little ground. Rates rose about half a point in two weeks.

So, if you approach decisions cautiously (like I do) and didn’t jump into a refinance, are you out of luck? I think not, but you may have to practice a bit of patience. Last week’s bounce higher may have been nothing more than a market reaction to the rapidity with which rates fell at the end of Aug.

Recall back to earlier posts when we discussed the reasons rates were falling: Europe appears headed for a recession, Brexit remains unresolved, and China’s economy is slowing dramatically due to the ongoing trade dispute. On top of that, talking heads have spent the summer trying to talk the US economy into a recession. Little has changed to mitigate those concerns.

Given that, I think it’s likely rates will ooze back down again. The question is when. Here’s what I’m watching:

The Federal Reserve meets this week, and pretty much everyone expects it to cut short term rates by a quarter point. That’s already priced into rates. What I’ll be watching is what the Fed puts in its post-meeting announcement and what Fed head Powell says at his press conference. If the Fed doesn’t acknowledge ongoing risks to the economy, rates will remain elevated longer.
Second, US manufacturing data has been soft, but consumer data has remained strong. If consumers stop spending money, the US economy will be headed for a soft patch, and that will move rates lower.
Finally, the trade war with China is hurting both countries, but it seems to be hurting China more. That may be softening China’s resistance to compromising on some of the thornier issues. A complete resolution seems unlikely anytime soon, but a thawing of positions might give markets confidence in the US economy and keep rates higher.

Rate update: The big reason mortgage rates aren’t lower

Interest Rates, Residential Mortgage Comments Off

Aug 142019

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

By G. Steven Bray

Trade uncertainty last week set off a feeding frenzy in the bond market. Investors gobbled up Treasury bonds in a flight-to-safety buying spree that saw the 10-year rate drop by 40 basis points (0.4%) in just over a week. The 10-year rate is now the lowest it’s been since 2016.

Given that we always talk about mortgage rates tracking the 10-year Treasury, shouldn’t mortgage rates be looking superb right about now? Well, not exactly. While mortgage rates tend to move in the same direction as the 10-year T-bill, there’s one big reason that mortgage rates lag behind when it comes to rapid rate changes.

When an investor buys a 10-year Treasury bond with a 2% rate, the investor knows that bond will pay 2% interest for exactly 10 years. Period.

When an investor buys a 30-year mortgage security with a 3% rate, the investor knows it will pay 3% for 30 years if and only if the borrower doesn’t sell, refinance, die. Of these, refinancing is the greatest risk when rates are moving lower.

Let’s say an investor buys a mortgage security with a loan balance of $1 million paying 3%. The investor expects to receive payments equal to the loan balance PLUS the interest paid on the loan, so the investor pays $1.04 million for the security – a premium to account for interest.

Now, let’s say rates keep dropping, and the borrower refinances after 12 months. The borrower has paid roughly $30k in interest, but the investor paid a $40k premium. Not a winning investment strategy.

Investors still want to purchase mortgage securities, so what do they do? They reduce the premium they’ll pay. The way this shows up for borrowers is in the interest rate.

In the example above, it takes $40k of premium to make everyone whole in the mortgage transaction. If the investor only offers $30k, the lender needs to make up the extra $10k, and it does that by offering the investor (and, thus, the borrower) a slightly higher interest rate – thus inducing the investor to pay the required premium.

Now, the borrower will see a lower rate than before rates fell because the cost of money is lower, but the borrower’s rate won’t fall as quickly as that of more predictable bonds, such as Treasuries.

If Treasury rates settle into the current range for a while, the refinancing risk will abate, and mortgage rates eventually will catch up.

Housing index says prices rising again

Real Estate Market, Residential Mortgage Comments Off

Aug 062019

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

By G. Steven Bray

Home price increases are accelerating again, so says Corelogic, a leading real estate data provider. It reported that its Home Price Index is increasing again on a month-over-month basis. In fact, the index rose 0.9% from May to Jun alone. Corelogic reported the annual increase was 3.6%.

Analyzing the reasons for the increase, Corelogic suggests lower mortgage rates may be the culprit. Rates for fixed-rate mortgages have fallen by nearly one percent since last fall.

Another reason may be homeowners’ reluctance to sell. As home prices rise, homeowners are questioning their ability to afford a replacement home, especially one in the same area. In a survey in higher-priced markets, Corelogic found three times as many people planning to buy as sell. Simple economics says that situation will put pressure on home prices.

While the current home price index remains near its recent low, Corelogic forecasts that it will rise above 5% again in the next few months. Even with continued low interest rates, that is likely to exacerbate the housing affordability problem, especially for moderate income homebuyers.

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