This is written by my good friend and mortgage broker James Adair
Mortgage Manager at Mortgage Trust Inc.
www.pdxhomeloan.com

(1/27/2009) As we plunge deeper into this economic darkness, the US government sponsored residential mortgage industry is becoming one of the rare places a regular family can go to seek some BENEFITS. The government has committed to purchasing mortgage backed securities (Fannie mae and Freddie Mac mortgage bonds, also referred to as MBS) for the next 6 months, in an effort to keep mortgage rates low and stimulate both purchase and refinance business. As that 30 year fixed rate hovers around 5% and below, many homeowners are in a position to refinance and open up some monthly cash flows.

One of the big changes we’ve seen in the last 6-12 months is a steady elimination of programs. Interest only options are no longer available on agency loans (agency = backed by Fannie/Freddie), and Adjustable rate structures, while still available, have had much higher rates than the 30 year fixed loans. So the only loan any lender is discussing with their clients right now is a 30 year fixed. Now, there are a few varieties of the 30 year fixed- the Conforming, the USDA, the VA insured, and the FHA insured.

The Conforming fixed, is the standard agency mortgage that we all know and love. The rates are indeed low right now, but there are some caveats to this. The pricing structure has changed dramatically, and the only folks who actually qualify for the BEST AVAILABLE PRICING are those with credit scores over 720, equity positions of 20% or higher, and verifiable income. Now then, if you have credit below that 720 threshold, and are still above 680, it is likely that you’d still qualify for some great savings, but the rate you get will have some risk premium built in to the interest rate. The minimum down payment required for the conforming mortgage is 5%.

The conforming fixed is also the only mortgage that allows for second homes, and investment purchases. The second home purchase pretty much acts like any other mortgage, the borrower’s credit and income just have to support all the debt that comes along with it. The Investment mortgage or “non-owner occupied” mortgage has become increasingly expensive. Fannie and Freddie have changed their risk premium structure to make these loans very expensive if the borrower has less than 25% equity (or 25% down if a purchase). These investor loans now require a minimum of 20% down, but the borrower will get a huge break on rate and fees if they go with that extra 5% down. Where the rate premium used to be about .5% higher on investment, I’m now seeing that spread widen, and you can expect a full 1%-1.5% higher interest rate on a non-owner occupied mortgage compared with a primary residence mortgage.

The USDA fixed, is a loan insured by the Dept. of Agriculture. Its purpose is to stimulate ownership in rural areas, and this loan will give the borrower 102% of the purchase price! The only catch is that the property has to be within certain USDA approved tracts. Some areas in our marketplace that qualify for USDA funding are: Sherwood, Boring, Estacada, North Plains, and parts of Yamhill County. This is a great loan! the rates are just as good, there is no downpayment required, and while there is an upfront Mortgage insurance premium due at close, there is no MI in the monthly payment.

The VA fixed, is a fixed rate mortgage very similar to the USDA loan in that there is an upfront MI premium at close, but no monthly MI. However, there is no geographical restriction to where a VA mortgage can be delivered. The only restriction is that the borrower has to have served in the US military with a standard discharge. VA loans can go for owner occupied properties only, but can be used for 1-4 units (single family through four-plex as long as the borrower lives in one of the units).

The FHA fixed, is fast becoming the “swiss army knife” of the mortgage industry. The Federal Housing Administration insures huge pools of loans dedicated to the more marginal borrowing profile. There is no sliding scale of risk associated with lower credit scores, although, most lenders have made 600 the minimum fico score required for the FHA loan. The downpayment is a minimum of 3.5%, there is an upfront MI premium due at closing, but it gets built into the loan amount. This upfront premium subsidises the monthly MI, and that is heavily discounted. On a purchase, I’m seeing regular working families (2 incomes of around $30k each) qualify to borrow over $250k on an FHA insured loan. The 3.5% down payment can come from a family gift. Non-occupying co-borrowers can help improve debt to income issues, and first time buyers can still qualify for the $7500 tax credit if they close before the end of June 2009. Even they’ve filed taxes for 2008, you can file an amended return and collect that credit immediately upon purchase. The FHA also allows borrowers to purchase properties up to 4 units, given that the borrower occupies one of the units.

Jumbo Mortgages
In addition to these fixed rate options, there are still a few players in the “non-conforming” mortgage sector. A non-conforming mortgage is one that doesn’t conform to agency guidelines. The most common of these guidelines that needs to be served is the “Jumbo” loan amount. A jumbo loan is one that exceeds the agency maximum of $417,000.00. There are a few big banks that will serve this market segment, but most will require:
1. outstanding credit
2. outstanding downpayments/equity positions
3. Low debt to income ratios

Also I’m seeing that the fixed rate non-conforming pricing is very unattractive, and virtually everyone is getting a 5 year or 7 year fixed rate ARM. These loans can also qualify for interest only pricing in many circumstances.

–
www.pdxhomeloan.com

Popularity: 24% [?]

I read a great article in CNN this morning that shows the national home market is starting a rebound. Nationally homes sales are up with buyers taking advantage of low prices, low interest rates and in some cases tax credits. Read the Article here.

Portland numbers look something like this:
Last January we had 1,908 new listings and 479 closed sales in Multnomah County
This January we’ll have 1,373 new listings and 250 closed sales in Multnomah County

These numbers indicate that prices will feel presure to go down until the number of closed sales starts to increase. But like we’re seeing nationally, there comes a point where homes become more affordable and an entirely new level of buyers are able to make purchases and lower the inventory.

Popularity: 15% [?]

So much happened in 2008 it’s hard to keep track. So here is my re-cap of 2008.

1. Interest rates drop but so do loan options: Interest rates at the begining of 2008 were above 6% and now we’re generally at or under 5% – that’s great news and it saves you money. At the height of the market there were literally thousands of loan programs and now there are fewer options. Most loans are 30 year fixed but you can still get FHA loans which have a down payment requirement of 3.5%. There are also new tax credit programs for first time buyers which increased activity in that sector and will continue to do so in 2009.

2. Inventory started at 12 months in January 2008 and stayed at 10 months most of the year and then shot up in November and December to 15 and 14 respectively.

3. Micro Markets re-emerge: I have been tracking inventories all year and most close-in areas have remained very low which is still to the advantage of the seller.

4. Financial markets have huge downward adjustment: Many people lost money in the stock market and their retirement plans. This further slowed the housing market as people had more trouble borrowing money and consumer spending dropped.

5. Foreclosures increase: We saw some short sales and VERY few REOs at the beginning of the year but now just in Multnomah County there are almost 800 homes that have been foreclosed and are owned by banks. These properties are generally in bad shape – some of them not financable and they sell at a discount. This creates lower market average and median prices.

All told 2008 was a rough year due to all the volatility – My hope for 2009 is that things will get more even keeled and people’s expectations will be in line with the market. This is going to be a year of wonderful opportunity.

Next week I will have info on current loan programs whether buying your first home or moving into your dream home.

Popularity: 15% [?]

I talk a lot about inventory when I share info about the market. Inventory gives you a great snapshot of the market at any given point in time to know whether it favors sellers or buyers.

Right now what everyone wants to know is not where are we, but where are we going….

There are two ways to get an idea of Where We Are Going.

#1: If you look at the last 6 months of sales and a given area has 10 homes selling every month on average but you have 20 pending you know the inventory will be getting smaller. On the flip side if you have 5 pending you know the inventory will be going up.

#2: Pricing always follows Transaction Volume. To get an idea of where pricing is going to have to look at the trend in sold volume. If less and less homes are selling when you look at the last 12 months of information then you can bet the prices will continue to fall. The interesting thing is that there is a delay from when transaction volume changes and pricing changes so if you watch it close enough you should be able to read when a change is coming.

Where We Are:
1- Inventory in the metro area is up and transaction volume is down. Close-in inventory is low due to demand staying strong.
2- Transaction volume is trending down due to seasonal shifts we see each year but even with that in mind it is still down. I expect prices in outerlying areas to take a big hit in 2009 with the closer in areas weathering the storm much better.

Popularity: 13% [?]

They say that only a fool makes predictions – especially about the future! So, in total disregard to that wisdom here I go with my top five predictions for Real Estate in 2009. Locally I will be watch inventory and transaction volume trends and will be sharing updates on www.sellpdx.com.

1. The U.S. Government will ramp up involvement in loans and add tax credit incentives to encourage more people to buy real estate and speed up the economic recovery.

2. Inventory in the US will remain at its current 10-11 month levels for all of 2009 except in areas that are having current declines due to over-pricing rather than over-building.

3. Portland will have two markets in 2009: Close in and well kept will stay very strong, Suburban and distressed will see steady declines through the year due to being more heavily impacted by foreclosures.

4. People will stop using their homes like credit cards due to a shift away from being ultra leveraged back to having an actual savings plan and increased difficulty in getting HELOC’s and 2nd Mortgages.

5. Jumbo Loans [where the loan is over ~$419,000 in Portland and higher in some markets] will have interest rates more in line with comforming loan rates and not the current rates which are much higher.

Wild Cards to watch for: Credit Flexibility, Government Intervention, Energy Prices

Popularity: 20% [?]