Mortgage Insights Blog

Radian Group, Inc. a major insurer of private mortgage insurance for conventional financing announced today that they will temporarily no longer offer mortgage insurance for purchase money loans in CA. Until recently, Radian was among the last mortgage insurance provider offering higher loan-to-value ratios, above 90%, for qualified homebuyers.

It turns out that Radian was insuring too many loans in CA, NV, AZ and FL. And since they realized their heavily weighted market share of over 50% of their insured loan volume were in these states Radian made the decision to temporarily suspend any new mortgage insurance in these states. Radian gained their market share from their more aggressive guidelines over other mortgage insurance companies who limited their exposure by enforcing declining market policies that capped their maximum allowable loan-to-value ratios.

With Radian pulling out of the CA loan market only a few sources remain which limit loan-to-value ratios to a maximum 90%. This means that if buyers choose to purchase a home with a conforming loan amount, funded through Fannie Mae or Freddie Mac offering the lowest interest rates possible, they will now have to put 10% down.

With interest rates offered on mortgage programs already 1% higher this year, higher down payment requirements are coming at an already tumultuous time in the housing market. Although there are still plenty of incentives left to keep homes sales trucking along through the summer, this news will not benefit our market place as it is just on the verge of recovery.

The good news is that FHA insured financing is still being offered with as little as 3.5% down up to $729,750 loan amounts in high cost counties, and there are plans to allow first time homebuyers the ability to borrower their qualified Federal tax credits upfront to cover their closing costs in the form of a bridge loan made by the State of CA.

Well, we're officially well into the spring/summer selling season and things are really heating up in our local markets - but how long can you expect this trend to continue? That's the trillion dollar question!

Looking back at May we had great news for California as existing-home sales are up 80% over last year. Locally we saw the median home price for Santa Clara County increase 9% to $475,000 as sales in the higher end homes have finally started to kick in (click here for current Santa Clara County housing stats). I guess when a qualified buyer realizes they can get a million dollar home for around $800k they feel it's a deal they just can't pass up. But then again, how many higher-end buyers are still out there that have the ability to make 30% down payments, especially when money is hard to come by these days.

To sustain an increase sales volume in the higher-end housing markets, we need to see the jumbo loan market (loan amounts above $729k) open up with some more aggressive financing, i.e. allowing higher loan-to-value ratios and less down payment - then we can expect the higher-end market to really rebound as it has already stopped falling.

On the lower-end of the housing market, home sales are still being dominated by foreclosures and short sales, with bank owned homes making up the majority of sold homes. In fact, there is such a demand for bank owned foreclosures that you can almost always expect a bidding war to break out, especially in the Santa Teresa, Blossom Valley, Cambrian, and South San Jose areas of Santa Clara County.

But is this trend going to continue? And what about that large pool of foreclosures that is ready to flood the markets, how will that affect home prices?  Well, from an insider’s point of view demand has definitely been stimulated by the first time homebuyer tax incentives and historically low interest rates. First time homebuyers are now comprising approximately 40-45% of the housing market.

According to the National Association of Realtors (NAR), first time homebuyers represented over 455,000 home sales purchased nation wide this past first quarter and these are most likely only the first wave as housing affordability conditions are at record high levels. NAR expects for the trend to continue and even realize a measurable increase in home sales during the second half of the year leading to further price stabilization in most areas (especially in Santa Clara County as we have already been experiences a stabilization).  

It may seem that the government's plan to increase home sales is really starting to become noticeable and even NAR’s own forecast is calling for a continued increase in home sales nationwide, but whether or not our local housing push can last through the summer has become questionable. Recent economic developments have lead to increases in mortgage interest rates and there are still a large number of buyers sitting on the fence unsure of whether or not it is a good time to buy.

It seems that the rest of the world has started to question the Fed's bail-out plan of issuing an unthinkable amount of new government debt...I guess overseas investors don't like the idea of financing old debts with new debts, and this has lead to a massive sell off of US treasuries further resulting in increased mortgage rates.

And if mortgage interest rates continue their current climb (last week we saw rates reported by Freddie Mac’s Mortgage Market Survey at a 7 month high) we could notice a negative impact on home sales. We have already seen a decline in overall loan application volume due to the higher rates, and housing affordability is sure to suffer along with it, but according to NAR higher interest rates are not a major determining factor when it comes to home purchases.

Beyond interest rates, mortgage programs as a whole are harder to qualify for, most requiring larger down payments of at least 10%. And if the lender calls for mortgage insurance there are additional underwriting overlays that can disqualify a majority of loan applicants – such as higher credit scores, lower debt-to-income ratios, and higher reserve requirements.

Overall, the current lending environment is not really conducive of a housing recovery other than the low interest rates that WERE present over the past few months. But, if these programs start to loosen as expected heading into the second half of the year, I believe that we will surely see another noticeable wave of homebuyers flood the market.

So what’s with that huge pool of foreclosure properties that the banks are holding onto? (Well, I had to keep the best for last – I wouldn’t want you to miss everything we have already covered).

It seems that the word on the street these days is that buyers should wait for the next wave of foreclosures to hit the market before they spin their wheels getting caught in bidding wars on the current inventory of REO’s.  Well, it may be true that there are bidding wars breaking out over these bank owned foreclosures, but don’t expect to see a massive volume of homes hit the market anytime soon. And the best deals may not be those often overpriced bank owned foreclosures, we are seeing the best deals being purchased by those few brave buyers willing to patiently wait for a short sale to close.

Some important points to consider for anyone watching the housing market - even if banks had a large inventory of foreclosed homes they wouldn’t unleash them on the market all the same time, it seems that they have learned a thing or two from 2007 and 2008, if they control the inventory they can artificially control the demand for housing. Plus, it just takes banks a lot longer to put these foreclosures back on the market once they are repossessed. Prior to 2007 banks could relist a foreclosure in as little as a month, now it can take as long as 6 months – banks are just so busy with staying on top of new business (refinance and purchase loan applications), corporate consolidations and re-organizations (Bank of America and Countrywide, Wells Fargo and Wachovia, Chase Bank and Washington Mutual), and just keeping on top of all of Fannie Mae and Freddie Mac’s mortgage guideline changes – surely marketing foreclosures is important but just how fast can you squeeze a watermelon through a garden hose?

Other factors contributing to the hold up is a longer foreclosure process brought about by state legislatures in an attempt to force banks to try every possible solution of keeping homeowner’s in their homes before they can be foreclosed. Additionally, state legislatures have extended mandatory moratoriums stopping active foreclosures and extending the required notice times before banks can repossess these homes. Furthermore, many lenders including Fannie Mae and Freddie Mac have begun a renter’s program aimed at keeping the foreclosed homeowner in their property as a renter with the ability to repurchase the home at a later date.

Not to mention that the short sale and loan modification processes has become more efficient. Lead by government policy, Making Home Affordable and Hope Now Alliance, lenders have the resources and the procedures in place to maximize their home retention efforts for those homeowners falling into default and for those homeowners unable to keep their homes, the ability to turn short sales around much faster. The banks have realized that they would rather avoid the high cost of foreclosing on a property than pay for the necessary repairs that many distressed properties require before they are even in a condition that can be marketed for sale, and once repaired then require additional maintenance costs. To read an article written this past January discussing such a pool of foreclosure properties please follow the link – Flood of Foreclosures: It’s worse than you think.

Final Thoughts: In my opinion, those buyers who are waiting for the best deal will be those that missed out on the lowest prices available in Silicon Valley real estate over the past decade. Remember, when purchasing a home for a primary residence one should not look at the purchase as an investment, rather one should focus on long-term appreciation, tax shelter incentives, advantages of owning over renting, and overall pride of homeownership.

Due to the current financial crisis, credit card carriers to mortgage providers are upping their credit standards and making it harder for consumers to qualify for an extension of credit.  It only seems timely that I spend this blog on reminding everyone the importance of actively managing your credit. 

First of all, active credit management does not mean the process of transferring credit card balances from credit card to another in order to get lower rates or even rewards points – that is debt management which is another important topic - rather if you are working on maintaining a higher credit score for an upcoming home purchase, or other purchase that requires high credit scores, then please pay attention:

How is your credit scores calculated? A consumer credit score is made up of five key components:

1. Payment History - 35% Types of accounts (credit card, mortgage, etc.), accounts paid as agreed, number of past due accounts, etc.

Be sure that you make all your payments in a timely manner. This is incredibly important in applying for new credit these days. If you have trouble remembering to pay some credit card bills or student loans on time, then be sure to take advantage of an automatic debit that can authorize your bank to make pre-determined monthly payments.

Be careful with auto debits though, if you happen to spend more on your credit card be sure to double check the monthly amount being transferred monthly is enough to cover the minimum payments. And sometimes, if your bank account does not have a large enough balance to cover the payment the auto payment will not be made.

And if a payment is missed, some creditors may allow a one-time exception and may delete a derogatory report from your credit history, but many do not. When you have a late payment the only thing that can heal your credit score is time – the more time that elapses form the missed payment date the less impact it will have on your score as you continue to maintain timely payments on all other debts.

2. Amounts Owed - 30% Balances of current loans, debt-to-credit ratio, proportion of installments still owed, etc.

Balances are another area where consumers can get into trouble. Many credit card holders may receive offers to transfer high balances over to another card fixed at a low interest rate – while it may make financial sense to save some interest it will actually have an adverse affect on your credit scores.

Using Balance Transfers Wisely - So if you are trying to maintain or increase your credit scores do not be tempted to transfer balances to a lower interest credit card because if you max out the credit line it will adversely affect your scores. And if you have to open a new account in order to transfer the balance, you will be hurt further by a credit inquiry and new account. But, if you already have a credit line maxed out, then transferring part of the balance to another card will help your scores. A general rule of thumb is to try to keep your credit card balances under 50% of the maximum credit limit available on the credit line.

3. Length of Credit History - 15% Time since accounts opened, last activity, etc.

This is another area of confusion; length of accounts is on of the most crucial yet often overlooked part of your credit score. The credit reporting bureaus want to see consumers establish long standing credit lines to prove that they can properly maintain credit. The bureaus give consumer tradlines with at least 5 years of seasoning (length of time you have had an active tradeline for) the highest points.

But if you do not use it then you loose it!  It is important to remember to charge these older credit lines at least once every few months in order to keep them active, since inactive accounts will not give you any positive points (or take any way either) and they also will not continue to season.

Think twice before closing your credit lines!!  Do not payoff old credit cards with new cards if you have the intention of closing the old credit account – once the account has been closed, you just lost that many years of credit history – which is not easy to rebuild.

4. New Credit - 10% Recent inquiries, new accounts, etc.

Be careful when opening any New Accounts before your purchase! New accounts need time to properly season – the bureaus need to make sure that you can manage any new accounts (increases to your credit liability) and will generally not provide positive points to newer accounts until they have at least 12 months of payments history reported to the bureaus. 

Credit Inquiries - When new accounts are opened the creditors will check your credit, which is called a credit inquiry. Many times credit inquiries will drop your score 10-15 pts for each new inquiry over a 3 month period. Consumer inquires affect your credit the most – these are credit checks for credit cards and other revolving debts (debts in which the credit balance can fluctuate based on your spending). Mortgage inquiries generally impact your score the least as the bureaus understand that consumers need to be able to shop for such a large purchase.

Be Wary of Department Store Credit Cards - Be mindful of this when you are constantly being offered new credit card accounts through department stores in order to save 10-15% off your purchases. Also, department store credit cards usually carry the highest interest rate terms – stick to your established credit cards, most major credit card carriers offer rewards programs that will go a lot further then saving a mere 10-15% off your purchase.

5. Types of Credit Used - 10% Mortgages, credit, retail, etc.

The credit bureaus want to see that savvy consumers are rewarded versus frivolous spenders. In other words, the bureaus are looking for a good mix of trade lines on your credit report i.e., more major credit cards than small department store cards, keep institutional loans (auto loans, student loans, etc.) for the full term of the loan, and do not co-sign for friends or relatives.

The larger the credit line, such as a mortgage or car loan, the more points you will eventually gain as you slowly pay off the loan over 5 or more years.

Please see my website for further details on how you can increase your credit scores - http://www.eaglefinancialgrp.com/ImproveYourCreditScore

Well, it was only a matter of time before the Feds attempts to keep interest rates low would backfire on them. Spurred by a sharp sell off in the long term US Treasuries market, interest rates rose over a full 1% this week but ended their rise just over 5%.  

Mortgage rates closely mirror long-term bond yields. Since home mortgages are long-term debts, it makes sense that they would follow closely to the movements of long-term debt security instruments such as the 10 year US Treasury bond.  Remember, the interest being paid on the mortgage by the borrower is an expected return that the investor (lender) is seeking in exchange for lending the borrower the principal loan amount.  If the investor (lender) thinks that there is an increased risk for future inflation (increased inflation devalues long term investments) then the investor will require an increased expected return to counteract the effects of the inflation risk – this causes mortgage rates to increase.

This week we saw the market get caught in the dilemma of the current economic recession which the government has tried to end by spending.  But that same government spending requires taking on more government debt, i.e. continued issuing of additional US Treasury Bonds, which now requires higher yields (expected returns) to attract new buyers. During mid-day Wednesday, bond yields broke out to higher levels, meaning bond prices started crashing, concerning equity traders to the point they started selling even further increasing bond yields.

Overall, the yields on bonds, and therefore mortgages, have come back down to Earth today, but this may mark the beginning of the end for the 4% 30 year fixed rate mortgage. Of course, considering where interest rates have been in the past – flashback to 1981 when we saw them reach 18% - if a homeowner is able to lock-in a mortgage rate in the 5% range they should consider themselves very lucky.