Jumbo Loans Are Driving Credit Availability

jumbo loan record numbersMillion dollar home loans are being handed out in record numbers even as many first time buyers are still finding it hard to get a loan.

Erin Gorman, managing director at Bank of New York Mellon Corp, said that she has seen more borrowers looking to take out $2 million dollars loans than at any time in the past. Some of the borrowers are even taking out loans to purchase second properties.

“These high-net-worth borrowers do act differently than first-time buyers, who borrow because they have to,” said Gorman, who serves as the national mortgage sales director. “High-net-worth borrowers don’t have to borrow. They choose to, so they’re very strategic about what, why, and when they borrow.”

Jumbo Loans on the Rise

The number of Americans who took out a home loan from $1 to $10 million in the most densely populated cities of America stood at more than 15,000 in the second quarter of 2014. That is the highest number ever recorded according to property data firm Corelogic.

There are a number of potential reasons why there is a sharp increase in high volume loans. Many wealthy buyers are looking to capitalize on their investments as the stock market rises and home prices surge upwards. The goal in many instances is to sell these homes for more than their purchasing price and thus turn a profit.

Many of these high end borrowers don’t even necessarily have to borrow in order to come up with the money they need. They do so strategically. At the same time, first time buyers are finding it hard to enter into the market. These buyers simply don’t have the credit scores that many lenders are looking for.

Right before the collapse of the housing market back in 2008, first time buyers made up about 35% of all borrowers. In June of this year, they only made up about 28% of existing home sales. Though many of the new first time buyers entering the market may not qualify for conventional loans, they may qualify for FHA loans. These have lower credit requirements than most loans which makes them especially attractive to first time buyers.

Credit Availability Increases with New Jumbo Loans

Mortgage credit availability has been increasing slightly ever month and that has continued from June to July, according to a report from the Mortgage Bankers Association. The increase was primarily due to a rise in the number of adjustable rate jumbo loans. Jumbo loans are simply loans that are above conforming loan limits. This limit may be higher or lower depending on where one lives.

Whenever credit availability decreases that means that lending standards are tightening. Whenever credit availability increases, that means lending standards are loosening. So, if you were not able to get a loan several months ago, this means that your chances of getting a loan now have improved slightly. Lending standards still aren’t as loose as they were back in 2008 before sub-prime mortgage crisis. But there is still an upward trajectory meaning more and more people will eventually be able to qualify for a loan as time goes by.  

Home Prices up 7.5% for the Year

home prices rising againAccording to a price index by CoreLogic, homes prices are up 7.5% in 2014 for the month ending in June.

However, this is actually a decrease from where prices where one year ago. Last year at this time home prices were at a 7 year high and had advanced 11.4% on a year-over-year basis. The slowdown in home prices is partially due to the sale of homes that are in foreclosure.

Foreclosed homes typically sell for less and thus reduce the average selling price of other homes in a given area. For example, when the sale of distressed properties rose sharply in 2009, home prices fell dramatically.

Good News for Buyers

The slowdown in home prices is good news for news for new buyers looking to enter the market. Last year buyers witness a sharply increase in home prices as well as mortgage rates. This came at the same time that wages remained stagnant for many workers. Paychecks for the average worker rose about 2% per year since the recession ended. This is about the same rate as inflation.
So, if you were one of the millions of people who was priced out last year because home sales were too high, now is an excellent time to reconsider buying a home. If you’re selling your home it may be worth holding onto it for a while longer.

Even if you’ve already purchased your home years ago, the drop in mortgage interest rates can still work in your favor. Refinancing to a new low rate can end up saving you thousands of dollars in interest payments over the life of your loan. Whether you’ve taken out a VA loan, FHA loan or conventional loan, there is likely a way for you to cut down your mortgage interest rate.
Closing costs remain low at many mortgage banks and there are still a number of places that are quoting interest rates in the 3% range. If it’s been a while since you’ve refinanced or you shave off at least 1% point from your interest rate, then it’s absolutely worth looking into a refinance loan.

The good news is that the qualifications for refinancing have gotten lower and lower over the years. If you’re unable to get traditional refinancing currently because the value of your home has declined, then you may be eligible to refinance through programs like the Home Affordable Refinancing Program (HARP).

Of course, if you’re looking to buy a home, not all areas of the country have been affected equally by the general decline in home prices. Some areas have seen the values of the homes actually rise. Areas in the southern part of California have seen an increase in home prices. If you find yourself in this situation, then you may be eligible for more conventional forms of refinancing.
Check with your local mortgage lender to find out how much you could possibly save by refinancing. You may very well lower your payment amount, shorten the duration of your home loan or potentially do both at the same time.  

New Report by Freddie Mac Shows Promise for Mortgage Refinance

new harp opportunitiesA new report by Freddie Mac showed that borrowers will save more than $1 billion over the coming year.

These borrowers were able to save money and often shorten their payment terms. In fact, of the borrowers who refinanced during the second quarter, 40% of them of them were able to shorten the duration of their loans. Now is an excellent time to consider saving money on a home loan and potentially shorten the duration of your loan at the same time.

Frank Nothaft, Freddie Mac VP and chief economist, had this to say. “The housing market realized a significant shift in the second quarter of this year as refinance activity fell below 50 percent marking the onset of the first purchase-dominated market the industry has seen since 2000 and an end to the refinance boom that started in late 2008. In this time we saw fixed mortgage rates hit all-time lows, with the 30-year fixed-rate mortgage falling well below 4 percent. We also estimate over 25 million American borrowers refinanced their loans to the tune of over $70 billion in total interest payment savings.”

What People Are Doing With Their Home Mortgages

A substantial portion of the refinancing from these mortgages came from cash out refinancing. It has been estimated that around $7.8 billion dollars in home equity was cashed out during the second quarter of 2014.

One of the reasons that this is happening is that people are building more and more equity in the homes as the economy and housing market improve. Overall, the United States economy grew by 4.1 trillion over the last two years.

How People Are Saving Through Refinancing

On average homeowners have been getting their interest rate reduced by 1.4% points. Over time this translates into roughly a 24% savings in interest payments over the life of a loan. Those who choose to refinance through HARP were able to save on average 1.6% off of their current loan. For the average borrower this translates into a savings of about 3,200 in interest payments during the first year.

If you took out a home loan before 2008 then there is a very good chance that you could potentially save quite a bit of money through strategic refinancing. Of course, in order to benefit from refinancing programs like HARP you must first be eligible for them. According to the official HARP website, you need to meet all of the following criteria in order to be able to refinance:

– The mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae.

– The mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009

– The mortgage cannot have been refinanced under HARP previously unless it is a Fannie Mae loan that was refinanced under HARP from March-May, 2009.

– The current loan-to-value (LTV) ratio must be greater than 80%.

– The borrower must be current on the mortgage at the time of the refinance, with a good payment history in the past 12 months.

Subprime Lending Moving Back Into the Mainstream

subprime lendingSubprime lending is becoming an option for many homeowners once more several years after an overflow of subprime loans brought the housing market to its knees.

Shortly after the financial crisis in 2008, subprime lending became synonymous with risk and foreclosure. Too many people simply couldn’t afford to keep paying their mortgages as they lost their jobs and the interest rates on their home loans increased.

Banks quickly abandoned these types of loans and tougher underwriting standards began to be put in place with the passage of the Dodd-Frank bill. But as of 2013 and well into this year, a number of banks are beginning to offer subprime loans once more.

What are subprime loans?

A subprime loan is a loan with an interest rate above prime rates for borrowers who are unable to qualify for prime rate mortgages. Subprime borrowers typically don’t have the best credit score and thus pay a premium to be able to borrow. They are statistically more likely than other borrowers to default on their loans.

When it comes to buying a house, a subprime loan can costs tens of thousands of dollars more than a conventional loan in interest payments. They are often used as a last resort after the borrower has tried and failed to qualify for loans that come with better terms.

Subprime loans that are being offered today

Only a handful of banks are currently offering borrowers subprime loans. Those that are offering these types of loans are attaching 8-13% interest rates with them as opposed to the 4% interest rates that borrowers can get with a 30-year fixed rate mortgage.

As underwriting standards have gotten less restrictive borrowers who have gone through financial hardship are finding it easier to qualify for subprime loans. However, these borrowers will have to pay a premium in order to compensate for the riskier nature of their loan. In most conventional loans, the borrower will end up putting somewhere around 10% down. For an FHA loan, the borrower may be able to still purchase a home with as little as 3-4% down.

The borrowers in today’s market who find that subprime loans are their only option will often end up putting at least 35% down. This has given them a rather limited appeal as many buyers simply decide to improve their financial standing than take out a loan with such a high down payment and interest rate.

Some housing market analysts have argued that subprime loans will likely continue to play a more important role as time goes on. It has been estimated that after the financial crisis, around 12.5 million people were shut out of the housing market who previously might have qualified for a home loan. Minority groups have been hit especially hard as the new regulations have made it more difficult to qualify for a loan. Easing these buyers back into the market could give new life to a housing market that’s had many ups and downs over the last several years.

Millions of Young Adults Absent from Todays Housing Market

young adult homeownersEven as the housing market continues to recover, there remains a large number of young adults who still aren’t buying houses.

Data from the U.S. census bureau shows that homeownership for young adults in America has declined from 43.6 percent to just 36 percent over the last decade. There are a number of reasons for this trend.

Why Homeownership Has Declined For Young Adults over the Last Decade

Interest rates aren’t the only thing that has been steadily creeping up over the last year. Home prices have as well, which is great if you’re looking to sell your house. It’s not so great if you’re a first time buyer looking to enter the market. The median price for a new home in the United States now sits at $290,000, which is the highest that it’s ever been.

What can be seen from looking at the numbers coming out of the housing sector is that the higher end of the market is doing well, but the lower end is still struggling. The young people in question are not only having a hard time making a down-payment for a home, but more and more aren’t renting either. About 3 million of them have had to move back home with their parents.

The reason that these young adults are moving back in is that the jobs that are continuing to be added to the economy are lower wage jobs. Those with stable jobs and good incomes are facing difficulties as well. Many of those who work in larger cities like San Francisco find that they simply can’t afford to purchase a house anywhere near where they work.

Student debt has also continued to play a significant role in keeping younger people out of the market. The more debt that a person has taken on to go to college, the more difficult it will generally tend to be to come up with the money to be able to afford a down payment on something like a home.

Economists have been arguing for a while that student loan debt has been a tremendous overhang on the market. Consider, for example, that students graduating in 2014 are expected to be the most indebted in history. Nearly 7 out of 10 college graduates will be in debt with the average graduate owing around $33,000.

In years past, it may have taken college graduates around 5 years or so to pay off all the debt that they accumulated to go to college. Nowadays, many young people make it well into their 30’s before they even start to get their student loan debt under control. Some have speculated that younger adults find it difficult to take on the psychological burden of adding on more debt.

So, unless something can be done about stagnant wages and the rising price of college tuition, more young adults will likely continue to find it difficult to afford their first home. The real question is whether this should be viewed as a policy concern for the government to deal with or whether the free market will sort things out. Either way, the absence of nearly 3 million potential homeowners will have implications for the housing market for years to come.

Fannie and Freddie Want to Play Bigger Role in Housing Market

fhfa mel wattThe housing market regulators Fannie Mae and Freddie Mac have outlined some new policies recently aimed at helping more homeowners get a mortgage as well as providing relief to troubled borrowers.

Fannie Mae and Freddie Mac don’t issue loans directly to consumers. Instead, they act as a sort of umbrella organization that insures loans against losses. They buy loans that originate from banks, securitize those loans and then sell the housing securities to investors while guaranteeing them against losses.

What Fannie and Freddie Plan to Do

One of the ways that the regulators have planned to accomplish this goal is by first holding off any reduction in the size of loans that firms are able to purchase. According to Federal Housing Finance Agency Director Mel Watt, there are plans in place to ease standards that determine when banks are required to buy back faulty loans. In time this would ease credit standards thus allowing more buyers to gain access to home purchase and refinance loans.

“FHFA will not use its authority as conservator to reduce current loan limits,” Watt told the Brookings Institution. “This decision is motivated by concerns about how such a reduction could adversely impact the health of the current housing finance market.”

Tight lending standards have made it especially difficult for first time buyers to enter into the market. And this doesn’t even take into account the fact that both home prices and interest rates have been steadily rising over the last year.

Along with helping prospective new buyers afford their first homes, one of the goals of the new measures is to help ensure mortgage market has ample liquidity. In other words, Fannie and Freddie are trying to help ensure that housing assets can be bought and sold easily without the sales affecting the price of homes.

Help for Troubled Borrowers

Watt stated that the Freddie and Fannie do not plan on taking measures to expand the Home Affordable Refinancing Program. HARP, as it is otherwise known, has played an integral role over the past few years in helping homeowners who are underwater refinance to an affordable rate. Borrowers with this program have been able to reduce the interest rates on their home loans and even reduce their monthly mortgage payments.

Instead of taking that route, there is a plan to improve servicing standards and help to improve foreclosure prevention programs. The so called “Neighborhood Stabilization Initiative” aims to target the areas of the country which have been hit by the housing collapse the hardest. The first pilot program for this initiative will launch in Detroit.

Many of the proposed changes that Fannie and Freddie are looking to implement will ultimately need to be passed through the congress. The House of Representatives is still controlled by republicans while the Senate remains narrowly controlled by Democrats. It remains to be seen whether or not there will be enough bipartisan support to pass any major bills, especially with the midterm elections just a few months away.

Is This the Solution to Homelessness?

tiny house movementActivists looking to solve the nation’s chronic homeless problem have come up with some interesting solutions.

Tiny houses could help give the homeless the safety net necessary to let them escape from a vicious cycle of poverty. This is the hope of people like Alan Graham, the founder of community first. His organization has already lifted 100 people out of poverty.

The Logistics of Building Small Houses

The houses being built are funded by private donors without any government support. They are approximately 100 square feet each. Some of them have functioning pluming and even a kitchen, which is somewhat remarkable considering how small they are. Depending on the amenities they have they can range in price from $100 to $5,000.

One organization in Eugene Oregon has managed to create homes for 45 people for less than $100,000. As a matter of comparison the median price for a single family home in Oregon costs around $200,000. Some people in neighboring communities are concerned with what the residents of these new low cost living quarters will be like. But there are guidelines to get into one of these homes. Residents must behave responsibly, refrain from using drugs and help with maintaining the properties.

One program in Utah has shown promise in moving the residents of the micro houses off the streets. That program has had a success rate of 74% in moving the chronically homeless into more permanent dwellings. This has given proponents of the tiny house movement encouragement as they seek to expand to new locations across the country. It costs taxpayers nearly $35,000 a year to support the homeless when they are incarcerated. By contrast, some of the tiny houses being built are funded by private donors for less than $11,000 per person. The implications this has on the housing market in these areas are sure to be beneficial as well.

Other Potential Applications for Tiny Houses

Of course, the homeless aren’t the only ones who struggle with housing issues. Millions of people barely make enough to pay their rent and get enough food for their families. These are ultimately some of the very people who are in danger of becoming homeless and in some cases do become homeless.

Not very many people would want to deliberately stay tied to a house the size of a jail cell. But the growth of the tiny house movement does have some interesting implications for those looking to buy a house for the first time. In particular, could the principles used to create the tiny homes be used to make affordable homes that are more permanent in nature?

It’s an interesting question. Smaller houses with simply the bare necessities that are developed efficiently and cheaply could certainly go a long way towards helping more people become homeowners. These smaller homes might sit on only a small section of land and be supported in part by renewable sources of energy like solar.

The problem is that the market ultimately determines how much a house is worth. Aside from the addition of government (or private) assistance to pay for a mortgage, the homeowner will always feel the weight of market forces. In the meantime, however, it’s encouraging to see at least the neediest get a little bit of help as they potentially become new homeowners.

Housing Market Recovery Set to Continue But at a Slower Pace

housing recovery paceA number of positive indicators have shown that housing recovery is moving along steadily, though the pace at which the recovery takes place is set to slow down.

Home sales were strong in the first half of 2013, but the second half of the year was much weaker than the first. Moreover, home prices only reflect where the state of the housing market has been and do not necessarily reflect where we’re headed. It takes around six months for new information on home sales to work its way into the official data.

This is why some economists have predicted that 2014 will mark a noteworthy slowdown in home value appreciation. With less buyers looking to get a home, there will be less demand for new houses. And with shrinking demand, a slowdown in home value appreciation is what would necessarily follow.

Home Values In 2014

Another factor that will have a direct impact on home values is interest rates. The Fed has kept interest rates low for years through its bond buying program, but it has already begun to scale back its efforts on that front. If rates on 30-year mortgages do rise, that could significantly hamper the number of people willing to get a home or refinance. This is exactly what happened last summer when rates were on the rise and many Americans held of purchasing a home or refinancing an existing mortgage.

So, higher rates would likely lead to lower demand which would eventually mean lower home prices. This could be great news depending on what you’re trying to do. It’s not good news if you want to sell your house. Homes are often the biggest financial asset most Americans have and falling home prices are akin to becoming poorer. On the other hand, it may be good news if you’re an investor or a prospective homeowner looking for a good deal. The biggest winners in all of this would likely be all cash buyers who can get the low price they’re after without paying a dime in interest.

Housing Recovery Strength Depends on Location

Even as the housing market continues to recover, some locations are expected to bounce back faster than others over the next five years. According to a new study released by the Demand Institute, by 2018 median home prices will reach their same peeks that were seen in 2006. But the recovery is not expected to be dispersed evenly.

In the 50 largest metropolitan areas in the country, the top 5 locations will see home values appreciate by an average of 32%. This stands in contrast to the bottom 5 which will only see prices appreciate by 11%. But this is only half of the story.

What the data reveals is a striking wealth gap that’s being created in the housing market. For example, the top 10% of cities now control 52% of all of the housing wealth. Many of these cities are located on either the East Coast or the West Coast. Some cities, by contrast, still remain underwater nearly 5 years after the recession officially ended.