Mortgage default risk has remained generally consistent for Freddie and Fannie acquisitions, down from 3.53% to 3.44% quarter over quarter. This brings the share of loans likely to be delinquent (180 days or more) to 3.44%. Read next: Debt ceiling debate hurts housing market Looking at borrower risk, GSE-backed loans remained relatively unchanged at 1.58%, … [Read more…]
If you have a mortgage, you may be unknowingly participating in a mortgage-backed security (MBS). That is, your humble home loan may be part of a pool of mortgages that has been packaged and sold to income-oriented investors on the secondary market.
Being part of an MBS won’t change much (if anything) about how you repay your home loan, but it’s helpful to understand how these investment products work and how they impact the mortgage and housing industries.
A mortgage-backed security is an investment product that consists of thousands of individual mortgages.
Investors can purchase MBSs on the secondary market from the banks that issued the loans.
When MBS prices fall, residential mortgage rates tend to rise – and vice versa.
A mortgage-backed security (MBS) is a type of financial asset, somewhat like a bond (or a bond fund). It’s created out of a portfolio, or collection, of residential mortgages.
When a company or government issues a traditional bond, they are essentially borrowing money from investors (the people buying the bond). As with any loan, interest payments are made and then principal is paid back at maturity. However, with a mortgage-backed security, interest payments to investors come from the thousands of mortgages that underlie the bond — specifically, the repayments in interest and principal the mortgage-holders make each month.
Mortgage-backed securities offer key benefits to the players in the mortgage market, including banks, investors and even mortgage borrowers themselves. However, investing in an MBS has pros and cons.
While we all grew up with the idea that banks make loans and then hold those loans until they mature, the reality is that there’s a high chance that your lender is selling the loan into what’s known as the secondary mortgage market. Here, aggregators buy and sell mortgages, finding the right kind of mortgages for the security they want to create and sell on to investors. This is the most common reason a borrower’s mortgage loan servicer changes after securing a mortgage loan.
Mortgage-backed securities consist of a group of mortgages that have been organized and securitized to pay out interest like a bond. MBSs are created by companies called aggregators, including government-sponsored entities such as Fannie Mae or Freddie Mac. They buy loans from lenders, including big banks, and structure them into a mortgage-backed security.
Think of a mortgage-backed security like a giant pie with thousands of mortgages thrown into it. The creators of the MBS may cut this pie into potentially millions of slices — each perhaps with a little piece of each mortgage — to give investors the kind of return and risk they demand. Mortgage-backed securities typically pay out to investors on a monthly basis, like the mortgages underlying them.
Mortgage-backed securities may have many features depending on what the market demands. The creators of MBSs think of their pool of mortgages as streams of cash flow that might run for 10, 15 or 30 years — the typical length of mortgages. But the bond’s underlying loans may be refinanced, and investors are repaid their principal and lose the cash flow over time.
By thinking of the characteristics of the mortgage as a stream of risks and cash flows, the aggregators can create bonds that have certain levels of risks or other characteristics. These securities can be based on both home mortgages (residential mortgage-backed securities) or on loans to businesses on commercial property (commercial mortgage-backed securities).
There are different types of mortgage-backed securities based on their structure and complexity:
Pass-through securities: In this type of mortgage-backed security, a trust holds many mortgages and allocates mortgage payments to its various investors depending on what share of the securities they own. This structure is relatively straightforward.
Collateralized mortgage obligation (CMO): This type of MBS is a legal structure backed by the mortgages it owns, but it has a twist. From a given pool of mortgages, a CMO can create different classes of securities that have different risks and returns (like different size slices, if we use our pie metaphor again). For example, it can create a “safer” class of bonds that are paid before other classes of bonds. The last and riskiest class is paid out only if all the other classes receive their payments.
Stripped mortgage-backed securities (SMBS): This kind of security basically splits the mortgage payment into two parts, the principal repayment and the interest payment. Investors can then buy either the security paying the principal (which pays out less at the start but grows) or the one paying interest (which pays out more but declines over time). These structures allow investors to invest in mortgage-backed securities with certain risks and rewards. For example, an investor could buy a relatively safe slice of a CMO and have a high chance of being repaid, but at the cost of a lower overall return.
The cost of mortgage-backed securities has a direct impact on residential mortgage rates. This is because mortgage companies lose money when they issue loans while the market is down.
When the prices of mortgage-backed securities drop, mortgage providers generally increase interest rates. Conversely, mortgage providers lower interest rates when the price of MBSs goes up.
So, what causes mortgage-backed securities to rise or fall? Everything from stock market gains to higher energy prices and even unemployment numbers have the ability to influence the prices. A variety of factors that affect the course of mortgage-backed securities, and lenders are constantly monitoring it.
Why do mortgage-backed securities make sense for the players in the mortgage industry? Mortgage-backed securities actually make the industry more efficient, meaning it’s cheaper for each party to access the market and get its benefits:
Lenders: By selling their mortgages, lenders save on maintenance costs, and receive money they can then loan out to other borrowers, allowing them to more efficiently use their capital. They often require borrowers to meet conforming loan standards so that they can sell mortgages to aggregators. They can also sell the loans they might not want to keep, while retaining those they prefer.
Aggregators: Aggregators package mortgages into MBSs and earn fees for doing so. They may give mortgage-backed securities features that appeal to certain investors. A steady supply of conforming loans allows aggregators to structure MBSs cheaply.
Borrowers: Because aggregators demand so many conforming loans, they increase the supply of these loans and push down mortgage rates. So, borrowers may be able to enjoy greater access to capital and lower mortgage rates than they otherwise would.
Of course, easier access to financing is beneficial for the housing construction industry: Developers can build and sell more houses to consumers who are able to borrow more cheaply.
Investors like mortgage-backed securities, too, because these bonds may offer certain kinds of risk exposure that the investors, mainly big institutional players, want to have. Even the banks themselves may invest in MBSs, diversifying their portfolios.
While the lender may sell the loan, it may also retain the right to service the mortgage, meaning it earns a small fee for collecting the monthly payment and generally managing the account. So, you may continue to pay your lender each month for your mortgage, but the real owner of your mortgage may be the investors who hold the mortgage-backed security containing your loan.
No investment is without risk. MBS have their advantages and disadvantages.
For instance, mortgage-backed securities typically pay out to investors on a monthly basis, like the mortgages behind the securities. But, unlike a typical bond where you receive interest payments over the bond’s life and then receive your principal when it matures, an MBS may often pay both principal and interest over the life of the security, so there won’t be a lump-sum payment at the end of the MBS’ life.
Here are some of the other advantages and disadvantages of investing in MBSs.
Pay a fixed interest rate
Typically have higher yields than U.S. Treasuries
Less correlated to stocks than other higher-yielding fixed income securities, such as corporate bonds
If a borrower defaults on their mortgage, the investor will ultimately lose money
The borrower may refinance or pay down their loan faster than expected, which can have a negative impact on returns
Higher interest rate risk because the cost of MBSs can drop as soon as interest rates increase
The first modern-day mortgage-backed security was issued in 1970 by the Government National Mortgage Association, better known as Ginnie Mae. These mortgage-backed securities were actually backed by the U.S. government and were enticing because of their guaranteed income stream.
Ginnie Mae began providing mortgage-backed securities in an effort to bring in extra funds, which were then used to purchase more home loans and expand affordable housing. Shortly after, government-sponsored enterprises Fannie Mae and Freddie Mac also began offering their version of MBSs.
The first private MBS was not issued until 1977, when Lew Ranieri of the now-defunct investment group Salomon Brothers developed the first residential MBS that was backed by mortgage providers, rather than a federal agency. Ranieri’s MBSs were offered in 5- and 10-year bonds, which was attractive to investors who could see returns more quickly.
Over the years, mortgage-backed securities have evolved and grown significantly. As of May 2023, financial institutions have issued $493.9 billion in mortgage-backed securities.
While mortgage-backed securities were notoriously at the center of the global financial crisis in 2008 and 2009, they continue to be an important part of the economy today because they serve real needs and provide tangible benefits to players across the mortgage and housing industries.
Not only does securitization of mortgages provide increased liquidity for investors, lenders and borrowers, it also offers a way to support the housing market, which is one of the largest engines of economic growth in the U.S. A strong housing market often bolsters a strong economy and helps employ many workers.
Bankrate insights
As of 2021, 65% of total home mortgage debt was securitized into mortgage-backed securities.
While you might not deal with a mortgage-backed security in your daily life, your mortgage may be part of one. And if so, it’s a cog in the machinery that keeps the financial system running and helps borrowers access capital more cheaply. It can be useful to understand that the MBS market ultimately has a powerful influence over qualifications for mortgages, resulting in who gets a loan — and for how much.
Source: finance.yahoo.com
The real estate market carnage continues with all the major iBuyers pausing home purchases thanks to the coronavirus.
This morning, Zillow announced that it had stopped home buying via Zillow Offers amid the “market uncertainty” related to COVID-19.
While it’s unclear if it was mandated, they did note that the move was “in response to local public health orders related to COVID-19,”and also to ensure the protection and safety of its staff, customers, and partners.
Specifically, some states like California have implemented emergency orders requiring individuals to stay at home and cease all non-essential business, which includes some real estate activities.
The company said it would continue to market and sell homes through Zillow Offers, despite halting open houses for its homes last week.
Zillow said it ended 2019 with 2,707 homes in its inventory, and as of March 19th, had reduced it to approximately 1,860 homes.
All 24 markets where Zillow Offers currently operates are affected by the move.
Meanwhile, Opendoor is putting cash offers on hold as a result of COVID-19.
In a statement posted on their website, the iBuyer said, “If you’re currently in our offer process, be on the lookout for communication from us. If you’re not, here’s how we can still help with your home sale.”
In terms of that help, they are still allowing third parties to make a cash offer for your property, as opposed to Opendoor itself.
If you take them up on that option, you can still skip the showings, prep work, and choose you own close date.
They said they’ll get back to customers via email within 2-3 days if eligible.
You can also use one of their partner real estate agents to list your home in traditional fashion, though I think we all know selling right now probably doesn’t make a ton of sense unless absolutely necessary.
I visited Offerpad’s website to see how they were being impacted, but couldn’t get a totally clear answer.
However, they do have an “important notice” posted at the top of their website that reads:
“To ensure that our customers, employees, and third parties are safe to the best of our ability, our processes have been subject to temporary changes.”
“We need to ensure that all services, including third parties, associated with a customer’s purchase or sale will be available. We appreciate your flexibility during this time.:
So there’s a good chance they are following suit and putting new purchases on hold as well.
As reported last week, RedfinNow was the first to temporarily halt home purchases, as indicated in an 8-K filing.
One issue, as mentioned by Zillow, is that real estate isn’t necessarily an essential business activity.
At least when it involves investors trying to make money by buying and selling real estate.
For everyday Joes looking to buy or sell a home, I assume it’s still okay to do so. It certainly can be argued as essential in certain situations.
However, a bigger concern is if this is the canary in the coal mine.
If billion-dollar companies like Redfin and Zillow aren’t interested in buying our homes, what does that say about the health of the real estate market?
I think the worry is if this situation doesn’t improve in the next several months, we might see scores of foreclosures flood the market, which could lead to lower home prices.
Conversely, if the government and loan servicers get ahead of it and work hard to help unemployed homeowners, things might turn out okay.
And really, with all the spending going on, there’s bound to be inflation, which could benefit homeowners as the world recovers.
Source: thetruthaboutmortgage.com
All 12 Federal Reserve districts have seen issues with a lack of housing inventory, which is largely due to existing homeowners holding back on listing their homes after previously locking in low mortgage rates.
Demand from the buyer side has remained steady or increased, however, and new home builders have responded to inventory shortages by increasing speculative inventory production, according to the Federal Reserve Beige Book, released Wednesday.
The Beige Book is a compilation of data and interviews with bank and branch directors, community organizations and economists from on or before May 22.
“Residential real estate activity picked up in most Districts despite continued low inventories of homes for sale,” the report states.
The Beige Book also notes that “home prices and rents rose slightly on balance in most Districts, after little growth in the prior period.”
In return, the lack of inventory of homes for sale pushed demand for rental properties in some areas — including New York, Chicago, St. Louis, Kansas City Federal Reserve districts.
Following are excerpts of statements on housing conditions from each of the 12 Federal Reserve districts.
***
Boston – Contacts around the District attribute the still-low sales numbers to low inventories more than to weak demand, as slightly lower mortgage rates have helped bring more buyers to the market.
House price appreciation has slowed on average but remains slightly positive, with the exception that home prices in Massachusetts (not including Boston) have experienced modest declines from a year earlier. The modest price growth in the Boston area marks a trend reversal from the preceding few months.
Contacts anticipate that, despite healthy buyer demand, home sales are likely to experience only a modest seasonal increase moving forward, owing to extremely low inventory levels.
New York – The residential sales market has been strong across the District. A New York City-area contact reports that the sales market in and around New York City has picked up strongly in recent weeks after a brief pause in early April, which was due to uncertainty in the banking sector.
After a slow start to the year, housing markets in upstate New York have also started to pick up, with bidding wars and multiple offers becoming more common. Inventory remains exceptionally low and is restraining sales activity in much of the District. A key factor suppressing new listings is the prevalence of homeowners with historically low interest rates on their existing mortgages, reducing the incentive to sell and move.
A strong economy and relatively high mortgage rates have pushed some movers to the rental market, boosting demand.
Philadelphia – High interest rates have continued to dissuade existing homeowners from listing their house and losing their low interest rate. Existing home sales have fallen moderately in this district, and prices have continued to rise as the market heats up again. New home builders have benefited from the unseasonably modest sales of existing homes as the resale market has slowed.
Cleveland – Demand for residential construction and real estate has stabilized in this District, and contacts attribute this stabilization to the arrival of spring and flattening interest rates.
Homebuilders have reported an increase in speculative construction projects in this District, as many buyers want to purchase and move into homes immediately, in part to avoid further rises in interest rates.
Richmond – Residential real estate respondents indicate in the report that the spring market is off to a good start, with sales prices continuing to appreciate, but not at the same pace as last year. For-sale inventory remains constrained due to fewer people putting their homes on the market, but buyer traffic has been steady while the days on market has increased slightly in the last month.
However, fluctuations in mortgage rates have caused buyers to pull back, with pending sales and closed sales both down in this District. Builders have been offering strong incentives to close deals.
Atlanta – Housing demand throughout the District has remained strong despite interest rate and home price volatility. Though home sales are down compared to a year ago, sales in many markets in this District have increased on a monthly basis, as buyer sentiment has modestly improved.
The supply of existing homes for sale has remained low as homeowners have showed increased hesitancy to list homes for sale, especially if they financed at a low interest rate. Home prices remain down from peak levels but have recently shown month-to-month improvement.
New home builders have responded to inventory shortages by increasing speculative inventory production, and some have begun to reduce buyer incentives.
Chicago – Residential construction activity has been down modestly in this District. Contacts report that high-interest rates have led some projects to be postponed or canceled and that while construction costs had fallen, the decline isn’t enough to offset higher financing costs.
Residential real estate activity has decreased modestly as well. Prices and rents have declined, and the low inventory of homes for sale has helped to prevent larger declines.
However, there have been reports of rising retail rents in some areas because of a lack of high-quality new construction.
St. Louis – Rental rates for residential real estate have increased slightly in this District. The number of new listings in residential real estate have dropped sharply in Louisville since our previous report, while new listings in the Memphis and Little Rock regions have remained unchanged. Seasonally adjusted home sales have remained unchanged since the previous report.
Minneapolis – Residential construction has remained subdued. Single-family permitting in April was more than 40 percent lower year over year in the Minneapolis-St. Paul region; most other large markets in the District saw even bigger declines. Discounts have started to appear for some speculative developments.
Closed (residential real estate) sales in April fell notably year over year across the District, with many larger markets seeing declines of 30 to 50 percent. Median sale prices have declined in western and central Montana and have been flat in several other markets.
Kansas City – Housing rental rate growth has remained elevated in several western District states, but the pace of increases has declined broadly and swiftly from the growth rate experienced during the past year.
Dallas – Housing demand broadly has held up in the Dallas District, though sales have continued to be weaker than a year ago. Contacts have noted a decent spring selling season, with prices largely stable, and builders have been able to raise prices slightly in selected areas.
Outlooks have been cautious, however, with some voicing concern about whether demand would hold up beyond the spring selling season.
San Francisco – Activity in residential real estate has slowed further in this District. Contacts across the District have reported stable demand for single-family homes, although high mortgage rates have restrained prices. Existing single-family inventory has been low, and owners appeared hesitant to forego their existing low-rate mortgages by listing their homes.
Despite reported improvement in the availability and cost of materials, construction of new homes has been flat-to-down as developers responded to higher financing costs.
Source: housingwire.com
Boston fintech firm Knox Financial plans to expand its lending business and loan products with $50 million in funding it received from a real estate advisory firm.
New York-headquartered Saluda Grade provided the funding in forward flow capital which Knox will use to expand its lending business into Georgia, Knox representatives said Wednesday. The fintech also will offer additional loan products, including home equity lines of credit (HELOCs), new purchase loans and cash-out refinancings.
“A homeowner’s best investment is the home they live in — far better than the returns we’ve seen from the stock market in 2022, and a great hedge against record-high inflation,” said David Friedman, co-founder and CEO of Knox Financial.
Established in 2018, Knox aims to help manage residential rentals with its algorithm-based platform. Its rental pricing and projection model also calculates the rate of return an investment property is expected to produce over time. When a property is enrolled in the platform, Knox automates and oversees the property’s finances and taxes, insurance, leasing, banking and bill pay, according to the company’s website.
The funding comes shortly after Knox launched its first mortgage product, dubbed the Knox equity access program (KEAP), in April. KEAP loans give homeowners access to capital, based on the equity in the home, to turn it into an investment property with Knox. Homeowners can then use their KEAP loan to fund a downpayment on their next home and to pay for repairs on their investment property.
In return, Knox charges an origination fee and third-party costs to the borrower. Knox also keeps 10% of the rental income generated from properties listed on its platform.
Prioritizing home equity solutions in a rising rate environment
The 2022 housing market has been underscored by interest rate spikes and refi decline and lenders are working hard to adjust to new borrower trends. HousingWire recently spoke with Barry Coffin, managing director of home equity title/close at ServiceLink, about the ways lenders can capitalize on these trends by revving up their home equity solutions.
Knox’s expansion comes amid a shrinking mortgage origination market. As mortgage rates began increasing this year, lenders, mortgage tech firms and real estate brokerages started laying off employees, often citing rapidly declining market conditions.
With rising mortgage rates, company representatives said Knox has seen growing interest in second lien products such as home equity loans or HELOCs from borrowers who have tappable equity but don’t want to refinance.
“As mortgage rates have risen, more inventory will become available at more competitive pricing,” said Matt Marra, chief growth officer at Knox.
Knox Financial raised $10 million in Series A funding in April 2021, led by G20 Ventures, following a $3 million seed round in January 2020. The largest markets for Knox are metropolitan areas of Boston, Atlanta, Houston, Dallas and Austin, Texas. According to Marra, Knox oversees a portfolio of $150 million in combined value.
Source: housingwire.com
Let’s talk mortgage basics: “What is the loan-to-value ratio?”
If you’re currently shopping for a home or already going through the mortgage loan process, chances are you’ve heard the phrase loan-to-value ratio get thrown around on more than one occasion.
You may have also encountered the acronym “LTV” while perusing mortgage advertisements or playing around on mortgage rate comparison websites.
Regardless of what’s going on in the housing market, you should know all about this very important term when applying for a home loan.
Why? Because it can greatly affect mortgage rate pricing, refinance options, and overall loan eligibility.
Simply put, the loan-to-value ratio, or “LTV ratio” as it’s more commonly known in the industry, is the mortgage loan amount divided by the lower of the purchase price or appraised value of the property.
If we’re talking existing mortgages (in the case of refinance loans), it’s the outstanding loan balance divided by the appraised value.
When calculating it, you will wind up with a percentage. That number is your LTV. And the lower the better here folks!
It’s actually very easy to calculate (no algebra required) and takes just one step. You don’t even need a mortgage calculator. In fact, you might be able to run the numbers in your head. Honest!
Let’s calculate a typical LTV ratio:
Property value: $500,000
Loan amount: $350,000
Loan-to-value ratio (LTV): 70%
In the above example, we would divide $350,000 by $500,000 to come up with a loan-to-value ratio of 70%.
Using a basic household calculator, not a so-called “LTV calculator,” simply enter in 350,000, then hit the divide symbol, then enter 500,000. You should see “0.7,” which translates to 70% LTV. That’s it, all done!
This means our hypothetical borrower has a loan for 70 percent of the purchase price or appraised value, with the remaining 30 percent the home equity portion, or actual ownership in the property.
LTV ratios are extremely important when it comes to mortgage rate pricing because they represent how much skin you have in the game, which is a key risk factor used by lenders.
Essentially, the lower the loan-to-value ratio, the better, as it means you have more ownership (home equity) in the property.
Someone with more ownership is less likely to fall behind on payments or foreclose, seeing that they have a greater equity stake, aka financial interest to keep paying the mortgage each month.
They’ve also got more options if they do struggle with payments, as they could just sell the property without taking a loss (or the bank losing money).
Not only that, but banks and mortgage lenders also set up pricing adjustment tiers based solely on the LTV ratio.
Those with lower LTV ratios will enjoy the lowest interest rates available, while those with high LTVs will be subject to higher mortgage rates and/or closing costs.
For example, if you’re being “hit” by the lender for having a less-than-stellar credit score, that adjustment will grow larger as the loan-to-value ratio increases (higher LTV ratio = greater risk).
So if your mortgage rate is bumped a quarter percent higher for a loan-to-value ratio of 80%, that same pricing hit may be increased to a half percentage point if the LTV ratio is a higher 90%.
This can certainly raise your interest rate in a hurry, so you’ll want to look at all possible scenarios with regard to down payment and loan amount to keep your LTV ratio as low as possible.
More importantly, just maintain an excellent credit score and you’ll have plenty of loan options, regardless of your chosen down payment or available home equity.
Most borrowers (who have the means) elect to put 20% down when buying a home, as it allows them to avoid mortgage insurance and the much higher pricing adjustments often associated with LTVs above 80%.
Fewer adjustments mean you can secure a lower interest rate on your mortgage. And if you can avoid PMI at the same time, it’s a win-win for your monthly housing payment!
You may also find it easier to get approved, as virtually all banks and mortgage lenders will accept LTVs of 80% or less.
But you don’t necessarily need to put 20% down to enjoy the benefits of a low-LTV mortgage.
Looking at the above example again, if you were to raise the first mortgage amount to $400,000 and add a second mortgage of $50,000, the combined loan-to-value ratio, or CLTV as its known, would be 90%.
Banks and mortgage lenders have both LTV and CLTV limits, meaning they won’t allow homeowners to borrow more than say 80, 90, or 100 percent of the property value.
These limits came down after the Great Recession but are creeping back up again…
Let’s do the math here; again, no mortgage calculator required!
Simple math: $400,000 + $50,000 = $450,000 / $500,000 = 90% CLTV
You would have a first mortgage at 80% LTV, and a second mortgage for an additional 10% LTV, making the CLTV 90%. Simply add up both numbers.
Sometimes borrowers elect to break up home loans into a first and second mortgage, known as combo mortgages.
This keeps the loan-to-value ratio below key levels, thereby reducing the interest rate and/or helping the homeowner avoid private mortgage insurance.
Tip: The undrawn portion of a home equity line of credit (HELOC) typically isn’t included in the CLTV calculation.
There are certain LTV limits based on home loan type, with conventional loans (non-government) typically being more restrictive than government loans.
And mortgage refinance programs often less accommodating than home purchase loans.
At the moment, you can get an FHA loan as high as 96.5% LTV, which is just 3.5% down payment.
You can get a conventional loan as high as 97% LTV, which at just 3% down is higher than it used to be.
In recent history, the maximum was 95% LTV, but now Fannie Mae and Freddie Mac are competing directly with the FHA.
[See FHA vs. conventional for more on that.]
You can get either a VA loan or USDA loan at 100% LTV (which represents no money down).
These are the most flexible loan programs LTV-wise, but they are also only available to veterans or those living in rural areas, respectively. So not everyone will qualify for these types of mortgage loans.
There are also proprietary home buying programs from various private mortgage lenders that allow for 100% LTV financing if you take the time to shop around.
If it’s a jumbo home loan, a cash-out refinance, or an investment property, the loan-to-value will be a lot more limited, potentially capped at just 70-80% LTV, depending on all the attributes.
And finally, those underwater or upside down borrowers you hear about; they owe more on their mortgage than the property is currently worth.
This can happen due to negative amortization and/or home price depreciation.
Property value: $400,000
Loan amount: $500,000
Loan-to-value ratio (LTV): 125%
As you can see, the underwater borrower has a LTV ratio greater than 100% (this equates to negative equity), which is a major issue from a risk standpoint.
For the record, you get 1.25 by dividing 500 by 400.
The problem with homeowners in these situations is that they have little incentive to stick around, even with a modified mortgage payment, as they’re so far in the red that there’s little hope of recouping home value losses.
However, the popular Home Affordable Refinance Program (HARP) allowed millions of underwater homeowners to refinance to lower rates with no LTV limit. And many of these folks are probably now back in the black.
Today, this type of program still exists, but is a permanent option known as a high-LTV refinance, or HIRO for short.
So there are options to refinance and get a lower interest rate, as long as your loan is owned by Fannie Mae or Freddie Mac, no matter the mortgage balance relative to the property value.
Same goes for FHA loans and VA mortgages thanks to the FHA streamline refinance and the VA IRRRL option.
Despite being far behind new homeowners entering the market in terms of building home equity, many of these formerly-underwater borrowers now have lots of equity thanks to rising home prices and several years of paying down their mortgages.
That’s why you have to consider the long-game in real estate and never give up, even when times get tough. This also illustrates why home buying shouldn’t be a quick or hasty decision.
As noted, a lower LTV will likely result in big savings thanks to a lower interest rate.
Additionally, you may be able to avoid costly private mortgage insurance, enjoy expanded loan program eligibility, and have an easier time getting approved for a mortgage.
If your LTV is higher than you’d like it to be, there are some creative options to lower it.
If we’re talking about a home purchase, simply bring in more down payment money and the LTV will be lower. Easier said than done, sure, but possible for some.
Perhaps someone will gift you the money or act as a co-borrower?
Alternatively, you can look into breaking up your financing into two loans, with both a first and second mortgage.
If it’s a mortgage refinance, simply pay down the mortgage balance a bit more before you apply, whether on schedule or by making extra mortgage payments.
This can be especially helpful if you’re super close to a certain LTV threshold, or just above the conforming loan limit.
Speaking of, pay close attention to your LTV – if it’s just above 80% or some other meaningful tier, think about adjusting your loan amount down (your loan officer should advise you here!).
Lastly, there’s another way existing homeowners can get their LTV down and it requires no effort whatsoever.
You don’t have to do anything except sit back and watch your property value increase over time, thereby lowering your LTV in the process. Of course, the opposite can happen too if home values drop!
But as noted, real estate should be treated with a long time horizon, so be sure you have the ability to ride the ups and downs and make moves when it’s most favorable to you.
Read more: 10 ways to build home equity.
Source: thetruthaboutmortgage.com
While it’s hard to compare the current possible housing crisis to the very real one experienced about a decade ago, there are fears of negative market impact due to COVID-19.
We’ve already seen listing prices fall, along with a big jump in delistings, where home sellers pull their properties off the market.
And home purchase mortgage applications continue to plummet, especially in large metros like LA, NY, and Seattle, per the MBA.
Meanwhile, real estate brokerage Redfin revealed via an SEC filing that it was laying off 7% of its workforce, which could result in roughly 236 job losses.
Then we have Wells Fargo curtailing its mortgage menu, and ARMs pricing higher than fixed-rate mortgages.
The number of mortgages in forbearance has also surged 1000%, and is likely to get a lot worse the longer this goes on.
The real estate and mortgage industry certainly isn’t operating as usual, and it’s even reminiscent of times back in the early 2000s.
This time around, the number one issue is inability to make mortgage payments due to loss of income or unemployment as a result of coronavirus.
Either companies have laid off staff due to a loss of business, or small business owners have taken a hit because they’ve had to close up shop.
Others might just be experiencing a temporary loss of income or a pay cut while companies navigate the uncertain waters ahead.
Whatever the situation, the problem seems to center around capacity to pay, as opposed to being overleveraged, or holding a home loan with some creative financing terms like interest only or an exploding ARM.
Homeowners could mostly afford their monthly mortgage payments before this unforeseen event took place, unlike the crisis that took place in the early 2000s.
Back then, borrowers took out mortgages they couldn’t afford, and serially refinanced them as their inflated home values grew.
Today, many homeowners have a sizable equity cushion, partially because cash out refinance volume has been very low, and also because home prices have risen a ton over the past decade.
This puts them in a much better position than those homeowners from 2006 who purchased a property with zero down financing and stated their income on the application.
That’s the good news. The bad news is many housing markets were already vulnerable before COVID-19 hit, and thus could see some an uptick in foreclosures if this plays out for a long period of time.
So where are the potential foreclosure hotspots, once any coronavirus-related moratoria disappear?
Well, a new “Special Coronavirus Market Impact Report” released by ATTOM Data Solutions found that half of the most vulnerable counties reside in Florida and New Jersey.
They rank market risk by looking at three main factors:
– Percentage of housing units receiving a foreclosure notice in Q4 2019
– Percentage of homes underwater (LTV 100 or greater) in Q4 2019
– Percentage of local wages required to pay for major homeownership expenses
As we know from the prior mortgage crisis, payment default was driven by homeowner equity to some degree, with underwater borrowers often throwing in the towel because they had nothing to lose.
This was further exacerbated if they didn’t have the money to make mortgage payments, or if they were simply overextended.
Finally, if a foreclosure notice was already received before the coronavirus pandemic took place, it’s clearly a bad sign for a situation that likely just got worse.
As for which counties are on alert, there are 14 in New Jersey, such as Camden and Ocean, along with five in the New York City suburban area: Bergen, Essex, Passaic, Middlesex, and Union counties.
And there are 10 counties in Florida, mostly in the northern and central portions of the state, including Clay, Flagler, Hernando, Lake, and Osceola counties.
Additional New York counties include Orange, Rensselaer, Rockland, and Ulster.
There are also a handful of counties in the top 50 in Delaware, Louisiana, Maryland, North Carolina, South Carolina, and Virginia.
Things appear to be a lot better in the Midwest and West, with just seven counties total landing in the top-50 most vulnerable list.
Every single Midwestern county can be found in Illinois, including Kane, Lake, McHenry, Tazewell, and Will.
Most are in the Chicago metropolitan area, a region that has never really seen massive amounts of home price appreciation since the crisis.
In terms of the West, only two counties made the top-50, including Shasta County, CA and Navajo County, AZ. Both aren’t major metros.
The report also revealed that counties where median home prices range from $160,000 to $300,000 account for 36 of the most vulnerable counties.
Meanwhile, counties with median home prices below $160,000 or above $300,000 made up just 14.
This is because those with median prices below $160,000 are among the most affordable, while those priced above $300,000 have some of the highest home equity amounts, and thus the lowest foreclosure rates.
The takeaway here is that most of the country looks pretty good overall with regard to housing market risk.
That could change depending on how long things play out, but there are plenty of mortgage relief programs available, including a 6-12 month forbearance via the CARES Act.
As long as this is somewhat temporary, and most homeowners get back to work, it should be a momentary blip.
Read more: How does mortgage forbearance work?
Source: thetruthaboutmortgage.com
After more than 18 years in executive management of a worldwide manufacturing company, Steve started his second career in real estate in 2002. Now, in 2023, his company, ERA Doty Real Estate, won ERA Real Estate’s Gene Francis Memorial Award for Top All-Around Company. Here he speaks with Realty Biz News about how his career change was at its core about culture.
Tell me about how you got into real estate.
Before I got into real estate, I was an engineer. I worked for a family manufacturing company for nearly 17 years. After the company was bought by a large German corporation, I realized we didn’t see eye to eye. I didn’t agree with some of their philosophies. I believed in supporting the families that we did business with, our vendors, and the people who worked in the plant. I believed that relationships were important within business.
It soon got to the point where I didn’t enjoy my job. I didn’t enjoy all the problems that went along with it. My blood pressure was high, I was smoking three packs of cigarettes a day, and the stress was literally killing me. One day in 2003, I was flying back from a trip to Seattle and realized I was dreading going back to work. I thought to myself, “I’m done with this, I’m just done.”
I told my mom, who had worked in real estate all her life, that I hated my job and she said, “Quit. Go into real estate.”
So, I took the suit and tie off and started my second career. Today, I wear boots and blue jeans and I don’t dress up. I may even come into the office in shorts. I absolutely love what I do now. It doesn’t feel like work to me. It feels like I play for a living. We laugh, we joke. We run around with a cowbell and ring the cowbell and cheer when people have big closings or put big deals together. It’s a lot of fun.
What makes your approach to real estate different?
When I started in real estate, the brokerage model was broken. All of these large offices had locks on the doors and locked file cabinets. They poked each other in the eyes, pulled each other’s hair, and stole each other’s clients. There was a lot of drama.
I just felt like it was time for something different and the market was ready for someone to look at the business differently. I promoted the mentality that a rising tide raises all ships, and we all began to help each other, collaborate and learn from each other and do things together. We were a performance culture. We were small, agile, collaborative, quick thinkers who helped each other.
As my company grew, I was able to acquire my biggest competitor in 2016. But then we stopped growing. We hit a wall because the new people didn’t share our ideology. I learned that this mindset doesn’t work for everybody. In the first 18 months following the acquisition, we walked about $21 million in sales volume out the door.
I paced the floor every night. I felt like a failure. I couldn’t figure it out and just when I was really struggling an agent walked in, sat down, shut the door, and said, “Be yourself and everybody will come. They want to be around you and your electricity. They want to be inspired. Stop trying to make people like it and let’s grow with the people that do.”
That was a life-altering moment for me and we began to grow from there instantly. As soon as we did it, that’s when we went from decreasing in sales to everybody being happy, going back to playing nice with each other, and growing a business again.
What is your guiding principle as a broker/owner?
That’s simple. My job is to be focused on growth but it’s not about growing the business – growing people is what I do. That just happens to benefit the business. The thing that may make me unique is that the terms “boss” “leader” and “mentor” make me a little bit uncomfortable.
We bring groups of people together to tell me what I’m doing right and what I’m doing wrong. I write those things on the wall and then within days of them doing that, I report back to them to tell them how we’re going to improve or change. I’m a person who likes to involve everybody in the building, know what their strong suit is and then figure out how to meet their needs. We treat an agent like a customer.
How do you sustain or create a cohesive culture in your company?
I’m a believer that you can’t create culture, you must embrace it and participate in it. We’re here to change people’s lives through homeownership. And we do that from a foundation of mutual respect for each other, our strengths and our weaknesses, and the absolute belief that we are better and stronger when we work as a team.
In addition to having a focus on helping each other out, being the best at our craft, and having fun, we also come together to help our community. Over the years, we have raised hundreds of thousands of dollars for numerous community projects including, The Special Olympics, The Salvation Army, The Muscular Dystrophy Association Smoke Out, Cystic Fibrosis, Operation Christmas Child, Pulling for Vets, The Northeast Arkansas Humane Society and more.
How do you define success?
At the end of the day, I think success is all about balance. You are happy with what you do and have time to enjoy your family, your community, and your personal life and the things are important to you. I’ve been lucky that what I do in my business makes me happy and that we have been successful because of it.
About ERA Doty Real Estate
ERA Doty Real Estate is part of the ERA Real Estate network, a global leader in the residential real estate industry for nearly 50 years that features a powerful network of like-minded entrepreneurs supported by the brand’s game-changing technology, products and powerful lead generation. With offices in Jonesboro, Paragould, Flippin, Mountain Home, Conway and Hot Springs, ERA Doty Real Estate serves clients locally in Arkansas and Missouri and works with out-of-town clients looking for retirement or vacation homes. The firm’s 160 agents specialize in all areas of real estate including residential, commercial and relocation.
Find topics in marketing, technology, and social media for realtors, and housing market resources for homeowners. Be sure to subscribe to Digital Age of Real Estate.
Source: realtybiznews.com
California-based Pennymac launched a product that can freeze mortgage rates as many as 90 days, in a bid to attract more borrowers to the market amid volatile rates.
Dubbed “Lock & Shop,” the product, rolled out in mid-June, has three terms, all of which include a shopping period, plus a built-in, 30-day period in which to close on the contract. The terms vary based on how much time a borrower anticipates needing to find their dream home: The 60-day lock gives borrowers 30 days to find their new home; the 75-day lock gives borrowers 45 days to shop; and the 90-day lock gives customers 60 days to select a home.
The product also allows a one-time “float down,” should rates decline. It’s available for all loan types, except for jumbo.
“As we know, the Federal Reserve has indicated they’re going to continue to raise rates, so we can lock in the loan with today’s rate for up to 90 days,” said Scott Bridges, senior managing director of direct consumer lending. “That might prevent you from either not buying the house you wanted or having to buy a lower-priced house because your payment would be higher with a higher rate.”
Pennymac’s product allows borrowers to extend their lock-in period at an updated rate if they do not find a house during the term length selected. Bridges said there’s no upfront fee, but the lender requires pre-approval to ensure borrowers qualify for a mortgage loan – in this case, the lender gives 50 basis points on the closing costs.
“There’s no point doing a Lock & Shop if your purchase is going to be fairly imminent, but we are seeing it to be a very popular product for our borrowers,” Bridges said. Pennymac has locked more than 100 applications with the product since mid-June.
Creating a path to success in today’s purchase market
Meeting the needs of a new generation of homebuyers while managing the ebbs and flows of a volatile housing market is a major endeavor for any mortgage lender. So, what should lenders be doing to thrive in the face of a post-pandemic housing market rife with new hurdles?
Pennymac is the latest mortgage lender to freeze rates for borrowers. In late June, fintech startup Tomo also announced a “Lock & Shop” product, allowing borrowers to lock in a mortgage rate for as many as 120 days, about twice as long as most lenders.
The product does not require a property address to guarantee a mortgage rate. Founded in 2020 by former Zillow executives Greg Schwartz and Carey Armstrong, the fintech startup focuses on the $1.6 trillion purchase mortgage sector.
“Consumers had seen so much news coverage on a threatened recession, inflation and interest rate increases that they got stuck,” Tomo’s co-founder and CEO Greg Schwartz said. “They are saying: ‘I’m afraid that if I start shopping now, by the time I find a place — because there’s still limited inventory, I still have to make multiple offers — and, by the time I find a home, I may have much less buying power.’”
Since January, mortgage rates have risen quickly due to high inflation and the Federal Reserve’s plan to tighten monetary policy. And that has put pressure on mortgage lenders with extended lock-in periods.
When rates are surging, lenders’ capital markets teams have trouble selling loans locked at a lower rate because investors demand higher returns. That often forces lenders to sell at par or take a loss.
But Pennymac and Tomo said they can offer extended lock-in periods because their capital markets teams are hedging the transactions (so they can avoid losses when selling loans at the current mortgage rate in the secondary market in the future) and the companies have strong balance sheets.
Last summer, Tomo launched its platform after raising $70 million in seed capital and achieving “unicorn” status. In 2022, Tomo said it raised another $40 million in a Series A round led by SVB Capital, which more than doubled the company’s valuation to $640 million.
Tomo, however, is not immune to the volatility in the markets. The digital mortgage lender laid off nearly one-third of its workforce in late May. The company does not disclose its origination volume.
Pennymac reported $490 million in cash as of March 31, according to Securities and Exchange Commission (SEC) filings.
The company delivered a pretax net income of $234.5 million in the first quarter, essentially unchanged from the prior quarter. Pennymac expects to lay off 207 employees in June and July following a workforce reduction filing of more than 230 employees in March.
Editor’s Note: This article was updated July 14 to indicate Pennymac offers three term options for its “Lock & Shop” product. After publication, a spokeswoman provided additional information about a 60-day lock term, which had not been initially disclosed.
Source: housingwire.com
“Even though the pace of layoffs has picked up, many businesses, particularly in transportation, healthcare, and hospitality, continue to have strong demand for workers,’ Mike Fratantoni (pictured), a senior vice president and chief economist at the Mortgage Bankers Association, said. “Data earlier this week showed that job openings in April increased to over 10 million … [Read more…]