Banker's Corner - Ussery Group Real Estate

Today’s unique environment of low real estate prices and historically low interest rates make purchasing investment real estate attractive.    

Despite changes in lending guidelines, it’s still possible and affordable to finance a non-owner occupied property. But lenders these days only make loans to investors who plan to hold the property for the long term, rather than “flipping.” Lenders also are making loans only on properties that can generate revenue rather than those strictly held for appreciation.    

During the real estate boom, many inexperience real estate investors purchased properties solely for their potential appreciation in value.  Lenders also got caught up in this irrational exuberance and allowed these investors to highly leverage their real estate positions. In other words, you could borrow a very high percentage of the price of the real estate investment. This allowed investors to purchase more property, creating more demand and more value appreciation through this demand. Then came the real estate downturn, and lenders have become more cautious.    

First, let’s look at what’s possible in the current financing environment. Because many lenders have curtailed their in-house lending on investment properties, the primary source of mortgages for investments is through loans that are eligible for sale to either Fannie Mae or Freddie Mac. These government-sponsored agencies still allow non-owner occupied financing at very competitive rates; however, the loan must fit their guidelines.     

There are three steps to qualifying for a government-agency backed loan. First, the borrower must demonstrate solid credit, sufficient income to carry the new debt, and adequate assets in reserves. Second, the property must be appraised to assess its value as well as its potential for rental revenue.     

Finally, if the property is a condominium, the homeowners’ association will need to fit Fannie Mae and Freddie Mac guidelines. This involves reviewing the overall financial well-being of the association, and making sure that it is a purely residential complex. If the complex is experiencing financial issues or if it appears to be more commercial than residential, Fannie Mae and Freddie Mac may not purchase loans made on units in the complex.    

The good news is that when the borrower and the property are eligible for a government-agency backed loan, rates and terms are very favorable. The borrower will need a minimum 20 percent down payment; even lower rates are available to those who make a 25 percent down payment.    

Unfortunately, there are several property types and transactions that will not fit Fannie Mae and Freddie Mac non-owner occupied guidelines. These include unimproved lots, construction transactions on investment properties, and condominiums that are do not meet the agenices’ guidelines discussed above. 

I’m not advocating avoiding these types of properties or investments altogether, but want potential purchasers to understand the challenges in securing financing for them. Instead of a typical mortgage loan, investors may look to alternative financing sources, including equity in other real estate or asset based lending. This will require more planning and flexibility on the part of the successful investor.    
As always, it is important to work closely with your Realtor and mortgage lender. There are great opportunities that can be had in today’s market. If you need more information, please contact a member of the Mortgage Lenders Association of Great Hilton Head Island.    

Ric Spiehs is a mortgage lender at SunTrust Mortgage on Hilton Head Island and executive vice president of the Mortgage Lenders Association of Great Hilton Head Island.

As 2009 draws toward a close I thought it might be worthwhile to take a look at current mortgage rate levels as well as were they have been in the last year.  If you have been following real estate at all you know rates have been historically low for a very significant period. These sustained low rates have been the result of the Federal Governments intervention to create demand for mortgage backed securities as well as low inflation expectations in the marketplace.

For the purpose of this post, I took a look at the Freddie Mac Mortgage Market Survey. This survey gives us a national average of mortgage rates on the 30 year fixed as well as the 5 year ARM. I use this survey when I want to try to get a perspective on big picture interest rate trends.

As of December 10th the Freddie Mac Survey reported the average 30 year fixed at 4.81% nationally. This is just slightly higher than the low for the year of 4.71% which occurred on December 3rd.  The highest reported 30 year fixed average came on June 11th at 5.59%. Overall, the average 30 year fixed rate has been under 6% since November of 2008; if you recall, around the same time the government began to purchase securities to try to stabilize the housing market.

In addition to looking at the Freddie Mac survey for 30 year mortgages I also like to look at the relationship between the 30 fixed and the 5 year ARM. When you do that you will notice that the mortgage yield curve is steeper than it was earlier in the year. This simply means that there are more tangible differences in the rates on loans with different fixed rate periods. Let me try to explain it with an example. At the end of February the average 30 year fixed was 5.07% while the average 5 year adjustable was 5.06%. That is not much incentive for a homebuyer to shorten their fixed rate term to five years. However as of the 10th of December the 30 year is 4.81% and the five year is at 4.26%.  This spread is 55 basis points or just over a half percent.
 
From the real estate buyers perspective, this data means that there are now significant opportunities for those buyers who are in a position to accept the additional risk associated with a shorter fixed rate period. Even better, there are at least some viable options to the 30 year fixed out there for homebuyers to consider when they are financing their home.

However the big question is what does it mean? Why would the spread between the 30 and five year have widened so much? First and foremost, it is a good idea to try to look at just where our overall economy was in February of 2009. The Dow was dropping from 8000 to below 7000, and there were questions everywhere about how bad things could get. Equity and Bond markets were being governed by fear rather than data. Since yield curves are generally influenced by market expectations, the flat curve reflects the total uncertainty that I think we were all feeling at the time.

So let’s speculate a little on what the current spread means. First of all it is important to understand that the .5% spread we are now seeing is much more “normal” than the flat curve we saw earlier in the year. That in itself is good news. My personal thought is that when yield curves begin to get steeper it means the market is expecting growth and with it some inflation. As a result, longer term, less risky, debt becomes more expensive than shorter term debt. In plainer terms, if you want to lock in today’s low rates for a full 30 years it will cost you more than if you choose to just borrow them for five years.

In summary, 2009 has offered buyers some tremendous financing opportunities and we do expect to see these opportunities continue in the beginning of 2010. However, we do know the government cannot support the market forever and there seems to be more and more positive economic data seems to be telling us the worst is over.

On October 27th a small piece of economic data came out that did not make many headlines, but I believe it is a significant sign of better times ahead in our housing market. The data was the Case Schiller index. This index is published by Standard and Poors and it measures housing prices in 20 major markets across the United States. While they do produce an index for each individual market they also publish a composite which gives us a reasonable overview of the national market.

On the 27th the data for August was released and the composite showed an increase of 1.1% over the July number. I know this does not sound like a big deal but it was the fourth consecutive month the index has increased. It is up around 7% since April of this year. I believe this is a significant sign of a stabilizing market. Prices appear to be leveling off and they are doing it in a tight credit market.

I understand that real estate is localized and there will be exceptions to every national trend, however it is important to note that lenders look to data like the Case-Schiller index when they are developing underwriting guidelines. For the last two years or so lenders have been forced to make lending decisions based on the knowledge that property values where declining. Of course this resulted in stringent guidelines. If the current property trend continues it would be reasonable to assume that we could begin to see a bit of loosening in the credit markets which could help add momentum to a rebound.

Obviously this is only one small piece of data and I know it will take a lot more to convince most people that things are turning, but I thought this was a very important number and it appears that it is currently being overlooked.

2009 has been an interesting year, to say the least. The nation’s financial markets have been turbulent and it seems uncertainty is everywhere. However, one of the bright spots has been interest rates. Of course there have been some peaks and valleys, but generally speaking rates, both short and long term, have been very low all year long.

As a mortgage professional I am excited about some of the opportunities these sustained low rates have been able to provide. In the past, rates have dipped quickly and the benefits have been reserved for a few select homeowners who monitored rates and put themselves in a position to act quickly.  In 2009, many more people have been able to take advantage of them. There have been baby boomers just a few years away from retirement that have been able to purchase their retirement home early, at a discount. There have been young people who could afford to purchase a home for the first time and take advantage of the income tax credit. There have been parents who have been able to refinance their current homes to finance college educations for their children, and do it with rates under five percent that will be fixed for the next thirty years. Call me sentimental, but these are some of the things that make working in the mortgage industry satisfying. Financial planners help people manage their investments, mortgage professionals help people manage debt.

Alright, I know there are more than a few cynics out there and I know what they are thinking – that these interest rates are the result of excessive government spending and that there will be a price to pay in the future. I would have to say I would agree with this statement, but I do not necessarily think this will be the end of the world. We all know everything comes with a price and I think it is very reasonable to assume that the price for 2009’s low interest rates will be some inflation and higher rates in the years to come. However, this will only be bad for those who fail to plan for higher rates going forward.

Common sense should help guide today’s debt management decisions. For example, if you have an adjustable rate mortgage that is set to adjust in the next three to seven years I would expect you to have a plan for paying down the principal so that you are not exposing yourself to too much interest rate risk when the payments start to adjust. Also, if you expect to have a major expense in the next few year it would be a good idea to explore your options for borrowing the money in today’s environment rather than hoping for the best in a few years. Finally, if you are considering purchasing a home, today’s low interest rates coupled with the tax credit and discounted properties, make now a great time to buy.

As great as it has been to see interest rates like we are currently enjoying we all know they can not last forever. I would encourage you to take a few minutes to review your current debt and try to forecast any future debt you expect to incur. During this review ask yourself how long your payments are fixed and when you plan to pay off the debt. Simply asking yourself these questions will get you started in the debt planning process. Depending on you situation the next step could be to consult with a mortgage professional to review your available options.

As always, if you have any questions please consult with a member of the Mortgage Lenders Association of Greater Hilton Head Island. (Special to the Island Packet)

As a mortgage professional I am always interested in what the Federal Reserve’s Open Market Committee has to say. Their meeting always seems to move the mortgage market one way or the other. The FOMC controls the United States Monetary policy, which means they can influence financial markets by purchasing large quantities of securities, adjusting short term interest rates, and determining the reserve requirements for banks. The FOMC holds regularly scheduled meetings eight times per year, at which time they may or may not make policy changes. However, they always issue a statement which will summarize their feelings on the economy and give a hint of what actions they are considering in the future.

At the most recent meeting September 23rd, the FOMC held the Fed Funds rate at .25% as expected, and they issued a much more upbeat statement than we have seen of late. They made positive comments about economic activity and household spending which appears to be stabilizing.

Obviously this was good news, but what I found most interesting was their clarification of their Mortgage Back Securities purchase program. They did say they would complete their $125 trillion dollar MBS purchase program. This was good news because there had previously been some doubt that they would go all the way to $125 trillion. Previous statements had set the amount of “up to” $125T. In the short run, this is good news for mortgage rates. Mortgages are effectively bonds, and the rates are not set by one particular institution. They are largely determined by the supply and demand of the bond market. The governments MBS purchase program has created demand which in turn has kept rates very low for most of 2009.

On the other side, based on the Fed’s comments it is clear they are winding down their policies which have helped keep rates low. The Fed plans to finish its 300 billion dollar Treasuries repurchase program by the end of October and the MBS purchase program should be complete by the end of the first quarter 2010. This is an attempt at an orderly exit from the direct Fed intervention that began when they announce the repurchase in November of 2008.

So the good news is in the short term we should still have very low rates based on the completion of the MBS program. The uncertainty lies in what will happen in the first quarter of 2010 when mortgage rates will be dependant on the normal market demand. It is more than reasonable to expect higher rates, the big question will be how much higher. There will be a price to pay for this years low rates. Obviously, inflation and higher borrowing costs, but as a free market proponent I will be glad to get back to a more unencumbered market.

Over the last few months mortgage lenders have had to make some adjustments to the way they do business. These changes are a result of new regulations dealing with the way the terms of a loan are disclosed to a borrower.  While these changes directly affect lenders, they are having an indirect affect on other members of our real estate community as well as buyers and sellers. The Mortgage Disclosure Improvements Act makes a number of changes to current regulation, but I would like to highlight a few that are having the largest impact on real estate transactions today.

The Mortgage Disclosure Improvements Act took effect on July 30, 2009. This Act is a provision of the Housing and Economic Recovery Act of 2008. This act, MDIA for short, amends the Truth in Lending Act and is aimed not only at making sure consumers know the rate and terms of their mortgage but also makes sure that they are given ample time to evaluate these terms.

The Mortgage Disclosure Improvement Act centers on a document known as the Truth in Lending Disclosure. This document, the TIL, summarizes the loan terms and financing charges that a borrower can expect to incur as a result of taking out a loan. The TIL informs the borrower of the Annual Percentage Rate on the loan for which they are applying. This rate, the APR, is a calculation that takes into account the note rate of the loan as well as any additional required fees and closing expenses the lender charges or requires in conjunction with the loan.

While the Truth in Lending form has been a required disclosure for years, the new MDIA rules create specific timeframes and waiting periods associated with its use. Lenders are required to provide borrowers with the Truth in Lending documents within three days of application just as they have done in the past. However, the new regulations require a seven day waiting period from the day that the borrower receives the TIL before the loan can close. There are no exceptions to this waiting period and the borrower may not waive this right. Lenders are also not permitted to collect any fees, with the exception of a credit report fee, prior to the borrower receiving the TIL.

The Mortgage Disclosure Improvement Act also requires lenders to issue accurate Truth in Lending disclosures. The APR on the final Truth in Lending cannot exceed the initial disclosed APR by more than .125% on fixed rate loans and .25% on adjustable rate loan. If it does, the lender must issue an amended Truth in Lending form, and there is a minimum three day waiting period before the loan may be closed. Again, there are no exceptions and no waivers.

Obviously, in an ideal situation, none of the issues I presented would be a problem. Lenders would make accurate estimates and issue accurate TILs to borrowers who had plenty of time to close their transactions. Unfortunately, it seems ideal situations are coming up less and less often. In many cases, changes to loan amounts and or terms can occur after the initial disclosures. When this happens it may be necessary to amend the original disclosure documents which could lead to a closing delay.  As a result it is more important than ever for mortgage lenders, closing attorney’s, and realtors to work together to make sure everyone understands the process and the timeframes for each step of a real estate transaction.

In summary, the new Mortgage Disclosure Improvements Act has helped institute many positive changes in our industry. Borrowers now receive accurate disclosure documents and are guaranteed ample time to review them. However, as with any change, the new regulations can create challenges when the unexpected occurs. As always, if you have any questions about the Mortgage Disclosure Improvement Act or just mortgages in general, please consult with a member of the Mortgage Lenders Association of Greater Hilton Head.

In today’s real estate market it is becoming increasingly common to see transactions involving distressed properties. The conventional wisdom is that purchasing a distressed property is always a good deal. While this can often be the case, I want to take a little time to explain some common types of distressed properties and to discuss some of the challenges these may present to prospective buyers. The two most common types of distressed properties are “short sales” and “foreclosures”.  It is important for the buyer to understand what these terms mean and also know how they may affect the negotiation and subsequent purchase process for the buyer. As with any real estate transaction they each pose their own individual problems and opportunities. 

Properties which are referred to as “short sales” are in the early stages of the foreclosure process. These properties are still owned by the homeowner who owes more on the property than they can sell it for in the current market. Attempting to negotiate a short sale is typically a distressed homeowner’s last effort to avoid the foreclosure process and salvage some of their credit rating.

Negotiating a purchase of a short sale can be an extremely cumbersome process due to the fact that there are a significant number of variables that are being considered before all parties can agree to a price for the property. First of all the buyer and seller need to agree on the price and execute a sales contract. Once this has occurred, the contract will be submitted to the mortgage holder for them to approve. This is where it gets complicated. The lender is in a tough spot. On one hand they have a customer who is facing foreclosure and they want to do what they can to help, and at the end of the day, lenders really do not want to own real estate. But on the other hand, they need to make sure that they are not taking more of a loss than they would if they simply foreclosed. To further muddy the waters the lender needs to make sure the homeowner really is having a hard time with the payments rather than simply walking away from the property because it has lost value. This process involves asking the homeowner to write a hardship letter and submit documentation to prove they cannot continue to make the mortgage payments. As you may imagine this process simply adds indignity to an already painful situation.

So let’s make an assumption that during the course of a short sale negotiation the buyer makes it past the initial contract stage and the lender approves the short sale. One might think that the buyer would be in good shape to acquire the property. However, there might be another lender with a second mortgage who would need to sign off on the offer and it is not unheard of for there to be a lender in third position. Once all the lending lien holders are on board for the short sale, there still may be issues with the Homeowners association where the properties are located. In most cases when a homeowner is behind on their mortgage they are also in arrears on HOA dues. These dues can create still another lien on a property which must be satisfied before it can be properly conveyed.

As you can see this can be an exhausting process. However, I would like to assure you I am not trying to discourage anyone who is considering purchasing property. I simply want to make sure that buyers know what they may be getting into before they become emotionally and financially obligated to an offer on a property. Short sales can often yield a buyer a property at a significant discount, however they are not for the faint of heart.

“Foreclosures” are properties which are being offered for sale by the lender after the homeowner has defaulted on their mortgage loan.  In this case the lender owns the property and is normally simply looking to sell the property and recoup what they can. This type of negotiation may be a little slower than a typical sale but not abnormally long. In most cases, lenders will want to verify that the buyer is qualified to purchase the property before evaluating any offer. This verification could be in the form of a pre-approval from a lender or verification of sufficient cash to close from the buyer.

In these cases, the good news for the buyer is that the lender has already taken possession of the property and in the process of listing it for sale they have evaluated the value of the property. This should certainly speed up the contract negotiation process. As far as challenges, there is one important thing to remember about homes that have been foreclosed. The previous owner was most likely evicted from the property. In the best of scenarios this homeowner probably did not do the proper preventative maintenance on the property, in the worst scenario properties have been willfully damaged. As a result, these properties will most likely need some work once they are purchased, but the other side to this coin is that they are probably selling at a discount and will be a great deal for the buyer who knows how to correct any problems they encounter.

Purchasing a distressed property can certainly have its advantage, but it is important to understand that there are numerous issues to work through to get to a successful closing. It is definitely important to have an experienced team working with you as you navigate the process.

Amid the turmoil that has engulfed the home financing environment some traditional mortgage programs have been quietly making a comeback. FHA and VA loans have become very attractive options for homebuyers who are looking to take advantage of current real estate prices but may not have a large down payment. While most loan programs that accommodate borrowers with less than 20% down have either been modified or eliminated all together, FHA and VA loans have remained relatively unchanged over the last few years.

FHA and VA loans are commonly called Government loans, but they are not actually made with Government Funds. These loans are simply insured by Governmental Agencies. The Department of Housing and Urban Development, or HUD, insures FHA loans, and the Department of Veterans Affairs insures VA loans. This insurance gives lenders the flexibility to offer loans with as little as a 3.5% down payment on an FHA loan and 0% down payment on a VA loan.

There are numerous advantages to FHA loans besides the fact that only a 3.5% down payment is required. First of all, the entire down payment may come in the form of a gift to the buyer, as long as the gift giver has no financial interest in the purchase. Acceptable gift providers are parents, relatives, and employers. FHA is also very flexible with regards to the payment of closing costs, FHA allows the seller to pay costs up to 6% of the loan amount for the buyer if they so choose. There are also no restrictions on income for FHA loans, they are available to anyone purchasing or refinancing a primary home as long as the loan is below the maximum FHA loan amount. In Beaufort County, the maximum FHA loan is $387,500.

VA loans are available to Veterans and service personnel who meet one of several qualifying criteria. VA loans do not require a down payment and can be made up to $417,000 in Beaufort County. VA loans also allow the property seller to help the buyer with closing expenses. The end result is an opportunity to buy a home with virtually no cash investment.

If you are currently considering purchasing a home and you think that you might benefit from an FHA or VA loan, I urge you to take the time to meet with a mortgage professional. In order to take advantage of many of the benefits of these loans you and your realtor will need to know how you are financing your purchase and how you need to structure your contract. For example if you will need to have the seller pay your closing costs this will need to be part of the purchase contract negotiations. There are also some additional forms that are required for purchase contracts on FHA or VA financed homes.

In the confusing market we now find ourselves in, government loans can provide us with some great benefits that can help get new buyers into homes. However, careful planning is necessary for the buyer to use these programs correctly. As always, if you have any questions please consult with a member of the Greater Hilton Head Mortgage Lenders Association.

The term “Ripple Effect” is often used in an economic context to describe how changes in one market can indirectly influence other markets. There has been a great deal of discussion about how the problems in Banking have rippled through and caused problems for the rest of our economy. However, I would like to look at how some positive news is beginning to ripple through the national housing market and how our market is positioned to benefit.

Over the last few weeks there have been some signs of improvement in our economy on a national scale. When measuring the health of an economy we look to data that we can measure on a regular basis and compare over time. On May 26th consumer confidence data was reported that showed the biggest monthly increase in consumer confidence in six years. On June 2nd  the National Association of Realtors reported that Pending Home Sales were up 6.7% nationally and over 32% in the northeast. This was the third consecutive month this leading index has shown an increase.

It might be easy to dismiss these numbers as national averages that do not have a great deal of local implications, but we must remember that Hilton Head Island and our mainland are destinations. Many, many, people in other areas of the country want to live and own property here. So when we see the national housing market and other regional markets begin to improve, we have to realize that the ripples will reach our area sooner than most, and as a destination we stand to benefit more than most. (Special to Island Real Estate)

Over the last six months the Federal Reserve has made a number of adjustments in an effort to stimulate our economy. The Fed is trying to create market conditions that induce businesses to invest in themselves and individuals to continue to consume goods and services provided by these businesses. To this end, they have lowered both short and long term interest rates. It is important to understand that short and long term rates are distinctly different and The Federal Reserve has had to implement different strategies to try to control them.

The two most well known short term interest rates are the Fed Funds Rate and the Prime Rate. The Fed Funds rate is the rate that banks charge one another to borrow funds overnight. This rate can be directly controlled by the Fed and it is their most commonly used policy tool. On December 16, 2008 the Federal Reserve lowered their target Fed funds rate to zero percent. The Prime Rate is the rate Banks typically charge their most creditworthy borrowers. This rate is normally 3.25% over the Fed Funds rate. As a result, Prime has been at 3.25% since the Fed lowered the Fed Funds rate to zero. Short term rates like these are generally used to finance businesses and some consumer revolving debt, such as home equity lines of credit. Since these rates can be adjusted quickly, the Fed has the ability to simply reset the rates when it deems necessary.

On the other hand, long term interest rates are tied to financial securities which must be held by someone for a period of time. As a result, rates on these securities are not directly controlled by the Federal Reserve, they are more a function of the supply and demand in the market. This does not mean they cannot influence them but it takes more than simply resetting the rates.

In an effort to lower long term rates and in turn stimulate the US housing market the Federal Reserve recently began purchasing mortgage backed securities. The Fed has made a 1.25 Trillion dollar commitment to these purchases which have obviously increased the demand for these securities. This increased demand has helped boost the prices of mortgage backed securities which in turn has driven down long term rates. While this is a very simplified analysis of the current long term market, it is very accurate to say that the intervention of the federal government and the Federal Reserve has helped bring homeowners the historically low mortgage rates that are being offered.

To take this a step further, now that we have identified what has happened we can try to look ahead to see what may be reasonable to expect in the near future. As far as short term rates, we know that since the Fed can move these rates directly we need to look at what might make them decide to move them. Traditionally, the Fed has lowered rates when it felt the economy needed a lift and there was no fear of long term inflation.  We all know the economy still needs a lift and from what I have seen in the Fed’s recorded meeting minutes they do not fear inflation at this time. However since the current rate is zero, we know the Fed cannot move short term rates any lower. So it is reasonable to expect that we should see very low short term rates until there are some very tangible signs that the economy is improving or that there is a credible threat of serious inflation.

As I said before, analyzing, much less predicting, the long term market is much trickier. However we do know that current rate levels are the result of some serious government intervention. Subsequently we need to try to determine how long the government will be willing and able to purchase mortgage backed securities. Rather than entering into a long and controversial discussion of the role of the government in financial markets I will allow the reader to make this call. What I will say is that the long term rates we are currently enjoying are lower than what an unrestricted market would yield us, so if you are considering taking advantage of them I urge you to do it while you can.

As always if you have questions about how the current market affects you or what opportunities it presents, please consult with a member of the Mortgage Lenders Association of Greater Hilton Head Island. (Special to the Island Packet)