Palos Verdes Source

Yesterday, the Fed lowered interest rates one-half a percent.   The Fed Fund Rate now stands at 1.5% and the Discount Rate is 1.75%.  What do you think happened with home mortgage rates?  No, they did not go down but went up instead one-half a percent.   A 30-year fixed loan at zero points for Palos Verdes real estate (and elsewhere) is 6 .375% conforming, 6.5% jumbo conforming and 7.5% for jumbo loans.

“Why the increase?” you might ask.  The word on the street is that this 1/2% increase in mortgage rates may be an aberration but is probably because the Federal Government has to sell tens of billions of dollars of Treasury Bills this week to cover debt.  The Government had to sell them at a discount which makes the yield higher.  Some of the rate increase may also be profit taking by the lenders.

Of course, 6.5% interest fixed for 30 years is still a good rate.  Only in the last five out of 35 years has the rate been lower.  And today’s 6.5% rate is with zero loan points!

30-year fixed interest rates are down today compared to the beginning of the month.    Jumbo loans actually went down 1/2% today (30-year fixed).   The remainder of the loan products quoted above are up one-eighth of a percent since the beginning of the month.

There are many changes in the wind for mortgages.  The word is that by December jumbo conforming loans will be gone.  No income verification loans are forecasted to be obsolete any day making it harder for self-employed borrowers to get loans.  There will also be less choices in loan programs as the current financial chaos settles.  For example, negative amortization loans and interest only loans are currently illegal in some states.

It is more important now than ever to get the counsel of a knowledgable, well-connected loan officer who can get you the loan.

Above loan information is provided by Jim Kurata, Peninsula Mortgage/Chase.

Lenders have been cautioning us for months to make sure our clients pull out cash from their home-equity line of credit if they are going to use it to purchase a home (without selling their existing home and avoid a bridge loan).  Many buyers are also using their home-equity line of credit to purchase second homes or income property.   The caution has been to have buyers immediately get that cash and put it in a separate account before they actually need it because many buyers have written checks to escrow to complete a purchase and found that their bank had closed or reduced their credit line.

Lew Sichelman in yesterday’s LA Times states that “Lenders need a valid reason to reduce, suspend or terminate such borrowing.”   His article goes on to explain that under Regulation Z there are 3 reasons a bank can pull your line of credit: (1) misrepresentation when applying for the loan (2) not making loan payments or (3) “when actions adversely affect the property pledged as collateral or the creditor’s security interest in the property”.

The Federal Reserve Board has interpreted Regulation Z’s definition of Item (3) above to mean that equity in said property has been reduced by 50% since opening the line of credit.  Sichelman states, “The 50% rule is not as wide as it seems, however.  Values don’t have to plunge 50% for your equity line to be shut down.  Rather, it’s only the amount of unencumbered equity that needs to fall by half.” Let’s assume your house was appraised at $100,000, with a first mortgage of $50,000 and the bank gave you a $30,000 equity line.  According to the Federal Reserve Board, the difference between your credit limit and available equity is $20,000 (50% of that is $10,000) and if your house decreases in value from $100,000 to $90,000, the bank can close your home-equity line.  Ouch!

If you have a home-equity line of credit,  the entire article linked above is worth a read. 

Interest rates were moving downward today.  A 30 year fixed conforming jumbo loan (maximum loan amount of $729,750) was 6.125 percent with ZERO points.  A minimum of 10% down payment is required and with a 20% down payment, there is no PMI (private mortgage insurance). 

Today’s rates are down 1/2% from a  month ago which increases affordability 5% and should bring more buyers to the market.  In the last thirty years, there were only 3 years with average fixed interest rates that were lower than today’s rates - 2003, 2004 and 2005. 

Above loan information is provided by Jim Kurata, Peninsula Mortgage/Chase.

Mortgage rates have changed again this week.  The market seems to  swing according to the media focus.  With the start of the Olympics, we may be in for a bit of a reprieve.  However, according to a CNN article by Les Christie, borrowers may benefit by locking in their interest rate (pre closing).  Several experts cited in the article expect interest rates to go up in the next six weeks and forecast at least 7% interest rates by the end of the year. 

“For every half point interest rate increase, the monthly payment on a typical mortgage of $200,000 jumps nearly $70.  That adds up to ore than $800 a year, and $8,000 in the first 10 years of a 30-year mortgage”  For Palos Verdes real estate, the numbers are much higher but one can use this information as a base to compute what it will mean to their new mortgage.  Locking in an interest rate today (if you are in contract or have a binder on a home) is good for 60 days and may cost as much as an extra 1/8 of a point.  It’s worth a call to your lender to inquire.

Above mortgage rates are provided by Jim Kurata, Peninsula Mortgage/Chase.

Friday’s mortgage rates are up between 1/4 percent (jumbo 5/1 Year ARM) and 3/4 percent (jumbo 30 year fixed) compared to my last Mortgage Update on June 8, 2008.  As you can see from the chart above, today’s borrower of a 30 year fixed loan will pay 6.5% conforming and 7.75% jumbo.  Attention buyers:  The time is right to get off the fence and purchase your new home now.  Rates are not forcasted to return to last year’s record lows and may even be going in the opposite direction.  There are FHA loans available with as little as 3% down on loan amounts up to $729,750 (this higher loan amount is only approved through the end of this year unless Congress extends it).

Above mortgage rates for Palos Verdes homes are provided by Jim Kurata, Peninsula Mortgage/Chase.

Friday’s mortgage rates are up slightly compared to our last Morgage Update two weeks ago.   At that time a 30 year fixed rate mortgage was 5.75% conforming and 6.75% jumbo.  As you can see from the chart above, today a borrower will pay 6.125% conforming and 6.875% jumbo.  Friday’s mortgage rates for Palos Verdes homes are provided by Jim Kurata, Peninsula Mortgage/Chase  

The above rates are provided courtesy of Sandy Deery at Peninsula Mortgage, email Sandra.C.Deery@Chase.com

Buyers may need 5% more down payment to buy homes that are designated to be in a declining market.  By the way, the entire state of California (including real estate in Palos Verdes) is considered a “soft market” by Freddie Mac and Fannie Mae.  Kenneth R. Harney of the Washington Post wrote an excellent article on April 26, 2008, entitled “Declining Markets and Self-Fulfilling Prophecies(which was reprinted in the April 27th LA Times) which is a real “heads up” to buyers, sellers and realtors.

For the past couple of months, lenders have been telling me stories about borrowers who are pre-approved but during appraisal review on the purchased property, they are suddenly told by the bank that they must come up with an additional 5% down payment as the property is in a declining market.  The appraiser must actually check one of the three boxes on the form that is submitted to the lender - “declining market”, ”stable market” or “increasing market”.  The lenders consider any area with over 6 months supply of inventory to be in a ”declining market” which then triggers the bank to request an additional 5% down payment from the buyer in a purchase (or 5% less cash to borrower if a refinance).  This can be a very unhappy surprise to the buyer who does not have the extra money sitting in his account.

This is also an unpleasant surprise to the seller who has taken his property off the market while the buyer is in the inspection and loan contingency stage.  A wise seller will want to know if the buyer has some “backup cash” to cover this possibility.    Realtors representing both buyers and sellers need to be aware of this potential issue to help guide their clients to a smooth closing. 

Conventional loans with 20% down payment may no longer be the norm.  I am told that Wells Fargo has recently notified mortgage brokers that FHA loans will also have the same “distressed market conditions” requirements.

The answer seems to change daily.  I checked with a lender today and a 30-year fixed conforming loan (now $729,750 for Palos Verdes Peninsula/South Bay real estate) is 5 3/8% with one loan point while a jumbo loan is 6 1/2% with one loan point. On a jumbo loan, lenders are requiring a minimum of 25% down payment (this is new).

A HUGE caveat on the conforming loans is that if the loan exceeds the original conforming loan limit of $417,000, the borrower would pay an additional 2 loan points on a purchase and an additional 3 loan points on a refinance.  It might be cheaper overall to get a jumbo loan of 6 1/2% plus one loan point vs. 5 3/8% and 3 or 4 loan points for loans above $417,000.  A borrower can also pay 0 loan points at a higher interest rate.

The news on units is even more ambiguous.  Following are old/new conforming amounts for continental United States:

         Old Amount              New Amount 
         $417,000   1 unit       $729,750
         $533,850   2 unit       $934,200
         $645,300   3 unit       $1,125,250
         $801,950   4 unit       $1,403,400     

However, there are currently no guidelines or funding for the new conforming limits and all loans over the old limits will fall under jumbo loan rates/ guidelines. 

Rates are extremely volatile (1/2 percent change from Friday to today).  As the financial markets continue to settle out, it is more important than ever to speak to a lender (prior to writing an offer on  a property) to get the latest rates and requirements as it may impact how you structure your purchase.

View additional charts from HSH Associates Financial Publishers.