Cool CA real estate listings and homes for sale, home buying, home selling information – Mathews Mortgage, Inc.

Mortgage Blog

New Housing Rescue Bill - What does it really mean?

July 29th, 2008 12:40 PM

Well, they did it, and to no one’s surprise: The Senate approved the $300 billion housing rescue bill on Saturday. President Bush has already publicly stated that he will sign it. Effective October 1st - most of the provisions in this bill will become law.

I am still trying to obtain all of the details of this bill; it does not help that many of the news stories are contradictory. This much I do know: This new law is an enormous undertaking, with several different aspects that will affect all of us to some degree. I will highlight what I know about the main provisions, and try to give a realistic view as to the probable outcome. As more news is forthcoming, I will continue updating my mortgage blog.

NEW: Fannie Mae and Freddie Mac, these quasi government/private organizations that purchase the majority of home loans available in the secondary mortgage market, are now formally being backed by our government. The Treasury Department will allow an unlimited line of credit to both organizations, and will have the authority to buy stock in the companies for the next 18 months.

MY TAKE: With more capital available to Fannie Mae and Freddie Mac, there will be a larger supply of money to lend to homeowners. However, because lending regulations have tightened, fewer borrowers will qualify for Fannie Mae and Freddie Mac loans. More supply and less demand will mean lower home loan rates in the future. The backing of these organizations by our government will also help to calm market fears regarding the solvency of Fannie and Freddie.

NEW: Fannie Mae and Freddie Mac will permanently raise their loan limits from $417,000 to $625,000.

MY TAKE: This will allow borrowers needing loan amounts above $417,000 to obtain lower rates than what was offered before (previously any loan over $417,000 was considered a "jumbo" loan which incurred a higher interest cost because it was not available for purchase by Fannie Mae or Freddie Mac.) This should help increase home sales and give some interest rate relief to the borrowers who fit into this category.

NEW: FHA will be allowed to insure up to $300 million in new 30 year fixed rate mortgages for at-risk borrowers. If the existing mortgage lender agrees to write down the existing home loan to 90% of the current appraised value, then FHA will make a new loan up to 95% of the current value, paying off the previous lender and financing closing costs. FHA will insure the new loan if the borrowers can prove the following:

Borrowers must have obtained the original loan from January 2005 through June 2007.
Borrowers must live in the home.
Borrowers must spend at least 31% of their gross monthly income on mortgage debt.
Borrowers must prove that they will not be able to keep paying their existing mortgage and attest that they are not deliberately defaulting just to obtain a lower payment. (I have no idea how this will be enforced)
Borrowers cannot have any additional debt secured by the home, such as a second mortgage or equity line.
Borrowers will not be allowed to obtain a home equity line or second loan for the next 5 years, unless it is for home improvement.
Borrowers must pay an annual 1.5% premium to FHA for insuring the loan. (This does not sound right--maybe reported incorrectly.)
Borrowers must agree to share any profits from future home price appreciation with FHA. These range from: 100% of profits will go to FHA if borrower sells within the 1st year, 90% of profits go to FHA if house is sold in the 2nd year. The percentage keeps dropping in 10% increments to a permanent 50% of profits going to FHA in years 5 and beyond.

MY TAKE: Whew!!! This is the part of the law that keeps people at the IRS employed. Like our tax code, this is one more convoluted formula that is extremely hard to calculate. Even if you fit all of the above criteria, you would still have to convince the existing lender to take less money than what they are owed. That lender is under no obligation to do this. Plus, if you sell the home, the annual premiums and profit sharing with FHA would be very complicated and possibly create a new haven for fraud. I am skeptical if this program will actually work with the way it is currently structured, I expect more modifications to this in the future.

In summary, Our Government is trying anything and everything to throw against the mortgage mess. Even though I do not agree with all of the details, I can’t blame them for trying. The ultimate goal is to decrease the amount of foreclosures. Foreclosed homes drive down real estate values. If more borrowers can stay in their homes, it will stabilize our housing market and we will recover from this. It seems like this is a step in the right direction.

There are additional provisions that I will address in the next blog. I am sure that additional information about this bill will be made available in the next few days.

MARKET UPDATE: Interest rates are a bit better than last week - average 30 year fixed is approximately 6.625% with no points. I am waiting to see if this housing bill will drive rates down a bit more.

Posted by Kevin Mathews on July 29th, 2008 12:40 PMPost a Comment (0)

Subscribe to this blog

Opportunties Part 2

July 21st, 2008 12:38 PM

My previous post described the opportunities that exist for first time or entry level homeowners in the current real estate market. Another group that is starting to benefit from the distressed housing market is the real estate investor.

When home prices were escalating over the last few years, it was difficult, if not impossible, for an individual to purchase a rental property and obtain a positive cash flow. The rent received from the property was not enough to cover the mortgage payment. The investors who purchased rental property had a negative cash flow. Now, with declining home prices coupled with increased rents, positive cash flow is possible in many areas throughout California.

The main reason for increased rents: The people who have recently lost their home to foreclosure or short sale are adding to the number of potential renters. These previous homeowners will not be able to purchase another home for quite a few years; the availability of loan programs for a borrower with bad credit as the result of a foreclosure or short sale are almost nonexistent. Therefore, they will have to rent. Since we have more renters than homes available for rent, the rent prices have increased.

A recent example of a rental property purchase: I have a client who purchased a duplex in Sacramento for $215,000. The mortgage payment including property taxes and insurance is approximately $1,400 per month. My client has already rented out both sides for $950 each, for a total of $1,900 per month. That’s $500 per month gross cash flow to start. Of course you do have to consider the interest expense on the money that he used for the down payment. He put 20% down -$43,000 - the monthly interest lost on this money is approximately $250 per month.

The other benefit of owning rental property is the depreciation write-off. In this case, my client will be able to claim an annual $8,000 depreciation expense write-off directly against his yearly income. The result is an approximate income tax savings of $2,400 per year = $200 per month in real dollars. Thus the equation looks like this:

$1900 Gross rent

- 1400 minus mortgage payment

500

- 250 minus interest cost on down payment money

250

+ 200 plus income tax savings from depreciation

$ 450 per month cash flow

There is the also the likelihood of increased rents in the future. Since the mortgage payment is a 30 year fixed, it will never increase. Yet the rents could easily increase over the next 30 years, making the net cash flow even higher in the future.

The negatives to owning rental property include the hassle of being a landlord, (you can hire property management for less than $100 per month). Vacancies and repairs can also be costly. However, if you can obtain a stable long-term renter who does not abuse the home, the positives will far outweigh the negatives.

MARKET UPDATE

With all of the turmoil regarding Fannie Mae and Freddie Mac, along with the bailout/failing of IndyMac Bank, our mortgage rates have increased this last week. The average 30 year fixed with no points for an owner occupied home is approximately 6.75%.

Inflation has also been a factor. This week the consumer price index was reported much higher than the experts predicted. I can’t see how the experts were surprised that our food and energy costs have increased. Most items that we purchase have to be shipped by a vehicle or manufactured by equipment that runs on gasoline or diesel. Therefore, the cost to produce or deliver these goods has to increase. When the costs increase, that causes inflation.

Posted by Kevin Mathews on July 21st, 2008 12:38 PMPost a Comment (0)

Subscribe to this blog

Opportunities in this market?

July 10th, 2008 12:54 PM

Remember when home values were soaring a few short years ago? Homeowners were thrilled; Realtors, loan officers, and contractors were busier than ever. Home prices were increasing at a frantic pace. It seemed as if real estate was a "can't miss" investment. We could not believe how quick home prices jumped -- it seemed like it would never end. (Boy, were we wrong!)

One group of individuals was not enjoying this rapid appreciation -- the entry level home buyer. The typical young person or family was being priced out of the market. I had several clients who kept chasing home prices, making low offers, and being outbid by another higher offer. Every month that went by, these potential home buyers would have to increase their offer price. The problem was that they did not increase their offers quickly enough to match the rate at which the market was appreciating. As prices continued to climb, they had to stop trying to purchase a home, and were forced to rent.

As it turns out, that may have been a blessing. Now that the real estate market has corrected itself, or is in the middle of correcting itself, home prices have dropped to a level that these families can afford. We are seeing increased activity in the $150,000 - $275,000 range. Despite what the news media is telling us, there are still home loan programs that offer 0% to 3% down payments. These loan programs are not the "sub-prime" type, but the traditional FHA, VA, USDA, and PERS loans. They all require income, asset, and credit qualifying. (This is a good thing!)

When you compare the monthly house payment in this range versus renting a small home, they are virtually identical. A $200,000 home purchased with 3% down payment will have an approximate monthly payment of $1,550 (including property taxes and insurance.) This same home might rent for $1,300 per month. After you factor in the income tax savings of owning your own home, you would actually spend fewer dollars overall by owning your own home instead of renting. Plus the added benefit of potential appreciation.

There is always a bright spot in any economic downturn. Because home prices are decreasing, an entirely new market of potential home buyers has opened up.

MARKET UPDATE

Interest rates on home loans have not changed much since last week. The average 30 year fixed is still in the low 6% range. However, the rate "trend" is lower - due mostly to the large losses in the stock market this week. There is some concern about the stability of Fannie Mae and Freddie Mac, the two quasi government agencies that purchase home loans and sell them to investors on the secondary market. Both agencies have been hard hit by the foreclosure mess and their stock prices have declined. Most analysts believe that if the problem escalates, the government wil step in to help, especially since Fannie and Freddie are responsible for approximately 50% of the loan marketshare.

Posted by Kevin Mathews on July 10th, 2008 12:54 PMPost a Comment (0)

Subscribe to this blog

Mortgage Meltdown Part 2

July 3rd, 2008 2:30 PM

This is the second part to my previous post dealing with the current mortgage crisis:

Even though we are right in the middle of a historic mortgage problem, there is some light at the end of the tunnel. The reason to be optimistic is that the large majority of the problem sub-prime loans were obtained in 2003 through 2006. Most of these loans had an initial 2 year period with the low payment and the low interest rate. The payments and interest rate would increase dramatically the start of year 3.

In late 2006 and early 2007, lenders quickly dropped these loans when they saw the foreclosure rates soaring. Since access to these loan programs were greatly reduced, there will not be as many homeowners with large payment increases in the near future. These problem loans should run their course. With dwindling numbers of foreclosures, our housing markets should stabilize and rebound a bit. Especially when investors determine that home prices have hit bottom.

I do not believe that our housing market will have large appreciation gains like we have seen in the past few years. Mainly because we will not have as large of a pool of potential buyers for property. The days of buying a home with zero down payment and the only qualification being that you could "fog a mirror" are over.

We have already made great strides in the lending industry to allow home loans only to people that can qualify based on their actual income, assets and credit history. It is a refreshing throwback to the way things used to be, before the banks went crazy with these easy qualify programs.

MARKET UPDATE

Interest rates for a 30 year fixed mortgage are ranging anywhere from 5.75 to 6.375% depending on the amount of closing costs you pay; 15 year fixed mortgages are ranging from 5.5% to 6.0%.

Rates are still quite a bit higher than 4 weeks ago - we have had an increase of approximately .5 % The main reason given is the fear or threat of inflation. Inflation has risen due to increased oil prices, which is in turn increasing the prices of food, energy and just about anything that is shipped and or produced using petroleum products, (just about everything). We do not expect rates to move lower until there are some signs that oil prices stabilize or decrease.