The clock is ticking for buyers and homeowners who want to grab a low mortgage rate in 2014. But if you stay on top of your game, keep your finances in order and act quickly, you can still grab attractive mortgage deals.
These 10 mortgage tips can help you with your mortgage decisions in 2014.
Potential homebuyers savvy enough to track these things are eying the yield on the 10-year Treasury note — an investment tool that’s proven itself a predictor of rises in 30-year fixed mortgage rates.
The note prompted collective gulps when it closed a hairbreadth from 3 percent on Christmas Eve, then hit 3.02 percent Friday, a benchmark unseen since July 2011, according to Bloomberg News. Depending on who’s talking, that could mean nothing or could signal it’s time to lock in favorable mortgage rates, which are hovering around 4.5 to 4.75 percent.
Middle Tennessee lenders and real estate brokers are wrapping up a successful year, one many said they’ll expect to see repeated in 2014, regardless of potential slight increases in rates. The Greater Nashville Association of Realtors Inc. is reporting more closings through November than in all of 2012.
“Does anybody know where rates are going? Absolutely not,” said Richard E. Herrington, president and CEO of Franklin Synergy Bank. “If we knew where rates were going, you would be contacting me in the Bahamas. Our perspective is that we’re going to see some gyrations, but we’re not going to see significant increase in rates for the next year or so.”
Middle Tennessee’s housing recovery is outpacing the nation’s. New-home sales slipped 2.1 percent nationally between October and November, but totals for prior months were revised sharply higher and the report solidly beat economists’ estimates, the Census Bureau said last week.
The new data show that consumers have adjusted to the recent rise in mortgage rates, economists said. Since the Federal Reserve began signaling in May that it would be dialing down its economic stimulus, 30-year mortgage rates have climbed from 3.51 percent. The Fed said it will begin tapering next month, reducing monthly bond purchases by $10 billion to $75 billion.
And while home sales slumped nationally in July, they picked back up, likely because Americans began to realize mortgage rates are still near historic lows, economists said.
Complaints over mortgages at 4.5 percent prompt chuckles from Susan Collins, a broker with Berkshire Hathaway HomeServices Woodmont Realty in Brentwood.
“When my husband and I built a house in the 1980s, we paid 11 percent, and it adjusted up every year,” she said. “Obviously, as the rates go up, it will push some people out of the market. But the market is still strong, and inventory levels are low.”
Still, Collins said, she’s seeing a little more hesitancy than before the recession. Buyers are less likely to offer more than list price, and appraisers are being held to a higher standard in assessing the values of homes for loans.
Too many people who overpaid in 2006 and then made costly improvements lost money, making today’s buyers more cautious with their optimism, she said.
One of her clients, Blye Hunsinger, plunged right into the Nashville market after landing a human resources job here. He and his wife lived in rural North Carolina, Hunsinger said, and decided to try urban life in Nashville. It made sense to buy right away, when rents on nicer homes were the same as mortgages, he said, and they were attracted by East Nashville’s cool vibe and walk-ability.
They are scheduled to close Jan. 13.
“We’ve been following mortgage rates closely and knew they were attractive now,” Hunsinger said. “Basically, all signs are indicating they would go up in the new year. That all mattered in what we feel is a competitive market. We’re coming from a housing area that isn’t as hot as Nashville and paying more than we thought we were going to pay. Seeing that tick up a point or two would have an impact.”
Big banks like Wells Fargo and Bank of America still rule the mortgage market, but their collective dominance has waned considerably over the last three years. Smaller lenders, some of them quite new, have stepped in to grab market share, often by emphasizing customer service and local expertise.
As of 2010, the top 10 originators held 80 percent of the primary mortgage market, according to a report this month by Fannie Mae. But only five of the mortgage originators that ranked in the top 20 in 2006 are still doing business today. And because so many large lenders have withdrawn, their share as of the first half of this year had dwindled to 60 percent of the market.
Moreover, as refinancing activity dies down, the remaining top lenders are shedding workers by the thousands.
Meanwhile, smaller lenders are picking up steam. “What we’re seeing is the community banks and regional market lenders taking a larger market share of residential business,” said Norman Koenigsberg, the president of First Choice Loan Services, a Morganville, N.J., subsidiary of First Choice Bank.
Founded in 2010, First Choice Loan is a case in point. Its loan origination volume grew to $2.26 billion in 2012 from $1.2 billion the previous year; the company will very likely end 2013 around the $2 billion mark, according to a company spokesman.
Mr. Koenigsberg attributes the growth to the company’s hiring of “qualified talent” in regional markets, and to a strong focus on purchase mortgages. Local knowledge is especially important to borrowers in competitive and often complex real estate markets like those in and around New York City, he added.
“You have multiple buyers interested in a smaller selection of properties,” he said. “Realtors and attorneys have educated their clients: Make sure you have your financing lined up with a reputable organization that’s going to walk you through the process.”
LoanDepot, an independent retail mortgage lender headquartered in Foothill Ranch, Calif., was also born after the housing crisis, in 2010. Since then it has seen average year-over-year growth of 300 percent, according to Anthony Hsieh, the chief executive. And customer service, he says, is paramount.
“Our average close time is a little more than 30 days,” he said. “We return your call in an hour. If not in the same day, employees get terminated.”
About 60 percent of the company’s business comes via the Internet or phone. The rest comes through the doors of its 60 branch locations, spread across 10 states.
“We’re going into a down year next year,” Mr. Hsieh said. “Loan volume is going to be less than this year, driven by the rise in interest rates. But nonbank independents, such as us, will continue to play a significant role.”
The Fannie Mae report predicts that this market shift is only temporary. Large mortgage lenders still enjoy a significant competitive advantage, in part because of their ability to spread fixed costs across a high volume of mortgage transactions. And as the housing market continues to improve, and risk concerns lessen, major bank lenders will again take back market share, researchers say.
But right now, there aren’t that many major bank lenders out there, Mr. Hsieh said. And on the nonbank side, there are none. Even Quicken Loans, the large independent online lender, holds around a 4 to 5 percent market share among all residential lenders, according to National Mortgage News. “America cannot be housed with just bank lenders,” Mr. Hsieh said. “Nonbank lenders are extraordinarily important, which is why you’re starting to see investment in new companies.”
Mortgage costs for borrowers without big down payments and with less-than-perfect credit scores are set to rise next spring.
Fannie Mae and Freddie Mac, the mortgage-finance companies that currently dominate the mortgage market, are boosting the fees that they charge lenders. Lenders, in turn, tend to pass those higher costs onto borrowers in the form of higher mortgage rates.
In an update posted to its website on Monday night, Fannie showed just how much more certain borrowers could pay after the fee hikes take effect next spring.
For instance, for a 30-year mortgage, a borrower with a credit score of 735 making a 10% down payment will pay fees totaling 2% of the loan amount, up from 0.75% right now. (Under a system devised by Fair Isaac Corp., credit scores range from 300 to 850.) An upfront fee of 2.5% can raise the mortgage rate by around 0.5 percentage points over the life of the loan.
For borrowers making a 10% down payment with credit scores of 750, fees will increase to 1.5% from 0.5%; and for those loans with a borrower credit score of 775, the upfront fee will rise to 1% from 0.5%.
Borrowers with larger down payments could also see higher fees. For borrower with a credit score of 690 and a 25% down payment, fees will rise to 2.25% of the loan amount, from 1.5%.
Fannie and Freddie have been working with their regulator, the Federal Housing Finance Agency, on the changes. Even though Fannie and Freddie have become enormously profitable, the regulator has said that the companies should raise fees in order to make non-government-backed lending more competitive, particularly for riskier loans. Spokesmen for both companies declined to comment.
A senior FHFA official said Tuesday that even with the latest changes, Fannie and Freddie will be charging less than what the regulator believes a private investor would require to meet a traditional rate of return. The FHFA last week announced the fee increases but didn’t provide specific breakouts for different borrowers. In a report, it provided additional analysis around why it believes the fee increases are needed.
In recent months, some large banks have been offering “jumbo” mortgages—which are too large for government backing—at rates below conforming mortgages. The higher fees contribute to the inversion of that spread between jumbos and conforming loans.
WASHINGTON (MarketWatch) -- In the third quarter, 791,000 more residential properties have returned to positive equity, CoreLogic said Tuesday. That still leaves nearly 6.4 million homes, or 13% of properties with a mortgage, that are in negative equity. Nevada had the highest percentage of mortgaged properties in negative equity at 32.2%, followed by Florida (28.8%), Arizona (22.5%), Ohio (18.0%) and Georgia (17.8%), CoreLogic said. Negative equity, often referred to as "underwater" or "upside down," means that borrowers owe more on their mortgages than their homes are worth.
Most financial planners aren’t very keen on reverse mortgages because their affluent clients have better options for funding retirement than taking on debt. But now, a federal government restructuring of its reverse mortgage program may make them even less appealing for planners.
New rules from the U.S. Department of Housing and Urban Development (HUD) that took effect in October reduce the size of some reverse loans, boost fees, and make drawdowns less flexible. The changes are aimed at making reverse mortgages safer, and encourage their use as a long-term financial-planning tool—rather than as a disaster-recovery tool.
But the industry faces an uphill climb convincing planners to recommend them more often. Rand Corporation research shows that only 2 percent of older homeowners have a reverse loan; another 10 percent have considered them. Among those two groups, just 6 percent say an advisor recommended the idea.
“There’s been a slow but growing acknowledgement that planners need to pay more attention to reverse mortgages,” says Michael Kitces, partner and director of research for Maryland-based Pinnacle Advisory Group. “But I think they’ll be less attractive as a planning tool after these reforms.”
A reverse mortgage allows people to turn home equity into cash while staying in their homes. Unlike a forward mortgage, in which the homeowner uses income to pay down debt and increase equity, a reverse mortgage pays out the equity in the home as cash; over time, the homeowner’s debt level rises and equity decreases.
The most popular loan type is the home equity conversion mortgage (HECM), which is administered, insured, and regulated by HUD. HECMs are different than traditional home equity lines of credit in that repayment of a reverse mortgage typically isn't due until the homeowner sells the property or dies.
Homeowners age 62 or older can qualify for HECMs if they have sufficient equity in their property. The loan amounts are determined by a formula that takes into account a percentage of the home's value, the homeowner’s age, and prevailing interest rates.
HECMs don't have to be paid back until the homeowner moves out or passes away. But defaults are possible because the loan terms require homeowners to continue paying property taxes, hazard insurance, and any required maintenance on the property.
The changes to the HECM program followed congressional action taken over the summer to address the problem of rising loan defaults, which pose risk for the Federal Housing Administration insurance fund, which backstops the loans.
Here are the key changes:
Consolidated loan types. HECMs used to come in two flavors: standard and "saver." Saver HECM loan amounts were 10 to 18 percent lower than standard loans, depending on the borrower's age, and fees were much lower. Now, the two loan types have been consolidated, with fees varying depending on the loan amount.
Higher fees. The mortgage insurance premium for larger loans (more than 60 percent of the available principal drawn in the first year) is now 2.5 percent of a home's appraised value, up from 2 percent. For loans below the 60 percent threshold, the fee is 0.5 percent, up from 0.01 percent. The fees were increased to shore up reserves of the FHA Mutual Mortgage Insurance Fund, which is used to repay lenders when they can't recover the full amount at the loan's termination.
Smaller loans and drawdown limits. Limits on the size of larger loans have been reduced by about 15 percent, and borrowers won't be able to gain access to more than 60 percent of the total loan in the first 12 months. This change is aimed at discouraging large drawdowns that can leave borrowers strapped if proceeds are used up and other income sources are exhausted.
Risk assessments. Starting in January, borrowers will be required to undergo a financial assessment to make sure they have the capacity to meet their obligations and terms of the HECM. Although the loans have no payments, borrowers must keep their homeowners insurance and property taxes current. Lenders will be required to assess a borrower's income sources, including income from work, Social Security, pensions, and retirement accounts. Borrowers' credit histories also will be considered.
Riskier borrowers can be denied, or required to make a "set aside" fund out of loan proceeds to pay future property taxes, hazard insurance, and even flood insurance in areas the federal government identifies as flood zones. The amount of money set aside could reduce loan proceeds substantially, because it will be based on the borrower's life expectancy.
HECMs are best used as reserve backup funds, similar to a home equity line of credit. That's what the saver HECM was good for—and with a mortgage insurance premium of 0.01 percent of a home's appraised value, it was an inexpensive option. The new HECM that most closely resembles the older saver HECM doesn't dramatically change the total loan amounts available.
However, the amount available for the new loan type resembling the old standard HECM is reduced by 13 to 16 percent, depending on the amount borrowed.
A team of planning experts has been arguing for the use of HECM credit lines as a backup resource in lieu of a large cash reserve because the latter produces negative returns in the current ultra-low interest-rate environment. A paper published last year by John Salter, Shaun Pfeiffer, and Harold Evensky made the case that an HECM credit line can extend portfolio life anywhere from 20 percent to 60 percent, depending on the scenario specifics.
Pfeiffer said the authors re-ran their numbers for the old saver HECM product against the revamped HECM, and found that the changes didn’t much affect their findings.
Kitces agreed that the standby mortgage strategy still can work under the new HECM structure—in theory.
“If you run the numbers over multiple decades, a couple thousand dollars in upfront mortgage insurance premiums doesn’t kill the strategy,” he said. “But in the real world, even if I can prove it works, that doesn’t make clients feel better about spending thousands of dollars on something they might never need. Holding cash might have a return drag, but at least I’m not writing a check out of pocket—it doesn’t hurt as much.”
Kitces also thinks many affluent households looking for a credit line will simply opt for a traditional home equity line of credit (HELOC), even though there are some important differences. Unlike a HECM, there’s no guarantee a HELOC will remain available, or won’t shrink. “But in many cases, you can get a HELOC with no fee at all. For someone who may not need the credit line anyway, if I have to pay all these upfront fees and costs, the HECM will not be very compelling.”
Lenders would get a new incentive to modify New York homeowners' underwater loans, under a proposal to be announced Tuesday by state officials.
Mortgage lenders could reduce the amount owed on the loans, in exchange for the right to share in the sale profits if the homes eventually rise in value, administration officials said. Previously, state regulations didn't allow such arrangements.
The initiative "will help keep more families in their homes and out of foreclosure, while at the same time reducing potential losses for investors," Gov. Andrew M. Cuomo said in a statement. "That's good for homeowners, good for local neighborhoods, and good for the long-term strength of the housing market."
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Under current federal rules, the majority of home loans in New York would not qualify for the program, because Fannie Mae and Freddie Mac -- the mortgage giants that buy roughly two-thirds of home loans in the state -- do not forgive outstanding mortgage balances.
However, the U.S. Senate is expected to vote as soon as Tuesday on a nominee to head the regulator overseeing the mortgage giants. The nominee, Mel Watt, is reportedly open to the idea of forgiving portions of mortgage principal.
The proposed state program would be open to homeowners owing more than their homes' value, and who have been turned down for loan modification. Banks would be required to make clear disclosures to homeowners about terms of the modified loans, and banks' share of profits would be limited to either half the gain in home value, or the total amount forgiven, whichever is less, said Benjamin Lawsky, superintendent of the state Department of Financial Services.
Reactions to the proposal were mixed Monday.
"If the homeowners could get out from being underwater it would give them a wonderful incentive . . . to keep paying their mortgage," Karen Ferrare, an attorney in Westbury who works with homeowners in foreclosure.
However, an economist who has studied "shared appreciation mortgages" said the proposal faces stumbling blocks. It's unlikely that banks would embark on such a program if it is not adopted nationwide, with many changes to federal and state rules, said Andrew Caplin, a New York University professor of economics. And it's unclear whether loan modifications would result in higher taxes for homeowners, he said.
The program would apply primarily to loans serviced by banks, not mortgage banks, since mortgage banks typically do not hold loans on their own books and do not have enough capital to buy the loans back, said Michael McHugh, chairman of the Empire State Mortgage Bankers Association and chief executive of Continental Home Loans in Melville.
Getting a loan reduction "would be helpful," said Victor Alexander Osorio, who said he owes $360,000 on his primary mortgage on a Baldwin home that he estimates is worth less than $310,000. But he expressed reluctance at giving up price appreciation to banks that got government bailouts during the financial crisis.More details about the proposed change will be posted at www.dfs.ny.gov. The proposal will be open for public comment for 45 days.
New home sales were still suffering the effects of the rise in mortgage interest rates in September, but fully made up for their earlier weakness in October. Higher rates do not appear to have done lasting damage to the housing recovery. The number of new home sales fell by 6.6% m/m in September but rose by 25.4% m/m in October. The upshot was that new home sales totaled 444,000 annualised in October. There were also some fairly large revisions to the data for earlier months The sharp increase in mortgage interest rates between May and August took a heavier toll on housing market activity than we had originally thought. However, this blow looks to have been entirely transitory. That's despite 30-year mortgage interest rates which are on average 60 basis points higher, which lends further support to our view that higher mortgage interest rates will not derail the housing recovery Turning to the supply picture, new homes for sale increased by 7.3% m/m in September but then fell by 3.7% m/m in October, to 183,000. There has been significant volatility in the months' supply of unsold new homes. But the bigger picture is that supply conditions are slowly loosening