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!

I have had several clients ask questions regarding foreclosure properties.  There have not been too many on the Palos Verdes Peninsula.  Foreclosures are not your normal purchase and a buyer is usually on his own (unless he hires a Realtor to act as his Buyer’s Agent to help him navigate through the process).  Here is the time-line for the process.  A NOD property is one that has a Notice of Default filed against it; the owner has 3 months to reinstate before the bank can foreclose.  A NOT property is when the bank files a Notice of Trustee’s Sale which is the actual sale/auction on the courthouse steps.  A REO property (is bank owned) has been taken back by the bank as it did not sell for the bank approved price at the foreclosure auction; usually a REO property will eventually be listed with a Realtor.

There is a new twist to the Foreclosure Sale/Auction - Duval County in Florida will be the first in the country to hold and Internet foreclosure auction next month.  The LA Times Business section had an informative article regarding the pros and cons (mostly cons) of allowing these auctions to be held on the Internet.  Currently, Florida is the only state that is not required to hold a public sale after notice has been given.

Buying foreclosure properties are not for the feint of heart.  Currently in California on the courthouse steps, “the auctioneer announces a property and bidders shout out their bids, raising them in $100 increments.  If they win, they have to pay the entire sales price, often within the next few minutes.  That usually means signing over that cashier’s check and collecting any change.”  Prior to the auction, “bidders have to research the properties’ histories, understand the local market and actually visit the homes” (usually just a drive by as the homes are still occupied).  Allowing foreclosure auctions on the Internet could open up potential problems for buyers who are lulled into a false sense of security by the property information  that is available on the Internet not realizing how much information they may be missing.

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.

Chris Ayres loves his house.  In his refreshing and thoughtful opinion piece in the LA Times, he challenges us to remember why we should love ours too.  He actually purchased his home one year ago and instead of bemoaning the fact that his home may be worth less today, he tells us why he is lucky.

First, the price - Ayres concludes a $1,200,000 purchase price, a loan of $1,000,000 at a fixed rate of 6%, and $200,000 of your own money for the down payment.  Next he factors a hefty devaluation of the property to $800,000 (and that is a big hit).  He moves on to inflation - ”At its current unbowdlerized rate of 5%, inflation alone will devalue your million dollar loan over the next decade to the “real money” equivalent of about $600,000, while at the same time causing your home to appreciate to $1.3 million..”  Ayres then factors in mortgage deduction and property tax deduction; in the 33% bracket over the decade, you would save $230,000.  He adds another $200,000 for the theoretical savings over the same period if you had waited to buy and paid a higher 8% fixed rate; “and the $700,000 of equity you’ll potentially end up with after inflation’s gone to work on both your loan and the value of your home.”   End result is a $1.1 million gain.

Palos Verdes real estate owners have been fortunate.  Our property values have reamained fairly steady this last year.  As perception can become a self-fulfilling prophecy, this article reminds us that we are really okay.

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.

That is the question of the hour from buyers of Palos Verdes real estate (and probably nationwide).  Should buyers believe the doomsayers or the optimists?  Today the LA Times has a very balanced answer to their question. 

Reasons not to buy are mostly from economic forecasts, statistics and ratios.  Reasons to buy look at the benefits of home ownership (you can’t be evicted, you can control the environment that you live in and looking ahead - you potentially can own your home free and clear/no monthly payments).  Another important factor is the mortgage interest deduction and property tax deduction which saves big money at tax time.  And if you are renting, you could spend less bottom line after income tax deductions. Gary Smith, a Pomona College economist is quoted as saying “Buying a house is risky, but waiting is risky too.”

Words of wisdom from the pros are: “Don’t count on price appreciation.  Don’t expect a house to make you financially stable.  Don’t buy if you think you may be moving soon.”  Richard Green, director of USC’s Lusk Center for Real Estate, says “A house can be like a car, something you use and enjoy and have for a while.  Whether it goes up or down in value may not be so important.”

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.

“How is my credit score determined?” ask buyers of Palos Verdes real estate.  The chart above details the scoring system used by Fair Isaac, the creator of the FICO score, one of the most widey used credit scoring methods employed by most banks and lenders in the United States.

What surprised me is that Payment History (35%) is twice as important as Length of Credit History (15%) .  Making even a small payment on time is important to your overall credit score.  Amounts Owed (30%) is a little more complex as it includes the total balances on each one of your lines of credit in proportion to the amount of total credit available.  For example, if you have only two lines of credit open, each with a $5,000 credit limit, and both lines of credit have a $4,000 balance, you will be left with only 20% of your total credit available.  This can seriously drag down your credit because you are viewed as possibly overextended, and you have little credit left over to leverage your high debts. 

For this reason, closing credit cards or other credit lines will lower your total available credit, and will likely drop your FICO score.   It may be wise to periodically raise the credit lines on your credit cards as a means to increase your total available credit, without having to open new credit cards unnecessarily.  Having too many lines of credit open can have a negative impact on your credit score. 

Speaking with a  good lender or morgage broker before making your real estate purchase is the best way to learn how you can improve your credit score.

Above chart courtesy of Progressive Title