The Mortgage Porter

A Jumbo Question: Conforming Loan Limits

A Mortgage Porter reader asks a very timely question regarding the proposed conforming loan limit:

"I just spoke to one of the major lending institutions and he recommended that if I can wait 3 – 4 weeks we may see a change in the non conforming guidelines such as amount that is normally set t $417,000 jump to either $620,000 or $630,000. 

Would you have any information on these possible changes and time line?"

Many people are full of questions regarding what's going on with the conforming loan limit.  Different figures and stats are being quoted from various sources.

The Certified Mortgage Planning Institute issued this statement yesterday:

CMPS Legislative Update - Higher loan limits inching toward reality!

Yesterday, the US House of Representatives overwhelmingly passed HR 5140 – an economic stimulus package that includes a temporary increase in the conforming loan limit and the upper threshold for FHA loan programs to as much as $729,750 in high-cost areas.  The temporary increase would last only until the end of 2008.  The bill would also restrict Fannie Mae, Freddie Mac and the Federal Housing Administration from guaranteeing or purchasing loans above 125 percent of the median home price for a given area.  That means that the existing $417,000 conforming loan limit for mortgages eligible for purchase by Fannie and Freddie would not increase in areas where the median home price is $333,600 or less.  The problem of course, is that as of right now, no one knows what the median home price is in different markets because this data has never been published by HUD!

Therefore, it would be up to the Secretary of Housing and Urban Development to determine the median home price for different housing markets "as soon as practicable," but no later than 30 days after passage of the bill, relying on existing commercial data where needed.  In other words, if median home prices in your marketplace are $336,000 or less, this bill won't really affect you; and there's no way to tell if median home prices in your area are higher than $336,000 until HUD publishes this data.  Nevertheless, jumbo relief is certainly on the way for places like California where median home prices are certain to be above $336,000.

Currently, the loan limit for FHA loan programs is between $200,160 and $362,790, depending on the county where the property is located.  The proposed higher limits for FHA loan guarantees are also set to expire at the end of this year, unless Congress passes other legislation intended to modernize FHA programs by introducing risk-based pricing and lowering down-payment requirements.

While House leaders thought they had reached an agreement with the Bush administration to include FHA modernization as part of the stimulus package, they agreed to continue working on that issue separately at the administration's request, the Associated Press reported.

In order to make higher limits a reality, the next step is for the Senate to pass the bill and for the President to sign it into law.  The target date for final passage set by the White House and Congressional leaders is February 15, so let’s hope for the best and we’ll be sure to keep you posted as we have more information.

Sources and helpful links:

·          Inman News

·         HR 5140

·         FHA Loan Limit Search – (Current Limits)

A Reply from Senator Patty Murray

Dear Mrs. Porter:

Thank you for contacting me regarding the issue of subprime mortgages. It is good to hear from you.

As you know, in 2008 an estimated two million homeowners could lose their homes as a wave of interest-rate resets are expected on adjustable rate subprime mortgage loans. If nothing is done, this level of foreclosures will undoubtedly result in hundreds of billions of dollars in lost home equity, declining home values in communities across the country, and an overall decline in the U.S. economy. I have long been concerned about this situation. Last spring, as Chairman of the Transportation and Housing and Urban Development Appropriations Subcommittee, I held a hearing to analyze proposals to reform and modernize the Federal Housing Administration (FHA) and other potential remedies to help stem the tide of projected home foreclosures.

I am actively engaged with my colleagues to identify ways to prevent the projected wave of foreclosures from being realized in the coming years. I strongly support efforts between borrowers and lenders to forestall foreclosure, but I believe there are steps that Congress must take as well.

To help educate borrowers of their options to avoid foreclosure, I secured $180 million in the Fiscal Year 2008 Consolidated Appropriations bill to provide housing counseling services across the country. Housing counseling programs assist borrowers with mortgage modification and restructuring so they can avoid or mitigate the losses associated with foreclosure.

In addition, I was a key leader in pushing S. 2338, the FHA Modernization Act of 2007, sponsored by Sen. Christopher Dodd (D-CT), through the Senate. The FHA Modernization legislation provides the FHA new flexibility to tailor products to customers based on their credit rating, income, and relative risk. FHA modernization is a key component in addressing the subprime crisis because it will enable the FHA to offer safe, alternative mortgage options - as opposed to adjustable rate mortgages to borrowers.                                                                                                                             

As the 110th Congress progresses, I will carefully consider all legislation regarding mortgage reform, and will certainly keep your thoughts in mind. Thank you again for contacting me, and please don't hesitate to share your thoughts in the future.

I hope all is well in Seattle.

First Mutual Bank merging with Washington Federal

Our company received a letter dated January 18, 2008 from Jeff Olson, Senior VP of Residential Lending for First Mutual Bank, headquartered in Bellevue, stating:

"Please be advised that the merger transaction between First Mutual Bank and Washington Federal Savings is scheduled to close Friday, February 1, 2008.

In consideration of that closing date, First Mutual Bank will not accept any residential loans...after 5pm, January 31, 2008...Loans that arrive after that date will be forwarded to the Wholesale Lending Department of Washington Federal Savings...These loans will be reviewed for eligibility under the Washington Federal loan program guidelines."

From First Mutual Bank's website:

January 28, 2008 – Washington Federal has notified First Mutual that it has elected to pay all cash consideration to shareholders of First Mutual for their shares of stock. Within 10 days following the close of the merger of First Mutual with and into Washington Federal, First Mutual shareholders will receive $26.8359 in cash for each share of First Mutual common stock owned. The merger is scheduled to close February 1, 2008

First Mutual recently constructed a bank branch in my town of West Seattle.  Looks like it may become a Washington Federal branch now!

Fed Cuts the Funds Rate Another 0.5%

The Fed just dropped the Fed Funds Rate to 3.00%.  Great news if you have a HELOC.  Prime will now be reduced to 6.00% and home equity lines of credit are based on the Prime Rate.  The Prime Rate = Fed Funds Rate plus 3 points.   The Fed also reduced the Discount Rate to 3.5%.

The market is currently rallying...I'll let you know if mortgage rates adjust with the rallying market with an update to this post.  I hope you locked in your rate!

The Fed is leaving the door open for future rate cuts:

Financial markets remain under considerable stress, and credit has tightened further for some businesses and households.  Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity.  However, downside risks to growth remain.  The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

We still have big time economic indicators that historically impact mortgage rates scheduled for the rest of the week:  Thursday's PCE and Friday's Job Report.

As always, I advise locking your interest rate if you're closing within the next 30 days.

Should You Refi?

Last week I did a quick alert on the 30 year fixed hitting high 4's-low 5s and I received an excellent comment from Sandy:

"...With all the costs and everything of refinancing, how much lower do rates need to be than what you currently have, before it makes sense to think about refinancing? I am just curious, as we have a 30yr fixed loan that is in the low 5s."

You would think this is a simple question with a simple answer.  There's much more to it.  Here are some things to consider if you considering refinancing your mortgage:

How long do you plan on staying in your home?   There are cost to the mortgage even if you're getting a "no cost mortgage" where the hard costs are actually financed into the interest rate.   If you cannot break even on the cost before you plan on selling or refinancing again (low 4's to high 5's would be unlikely), then refinancing for the purpose of reducing your rate may not make sense.

Do you have an Adjustable Rate Mortgage?  If you're going to retain your property longer than the remaining fixed term on the ARM (adjustable rate mortgage), you may want to consider refinancing into a fixed mortgage.

Do you have private mortgage insurance or a second mortgage?   Sometimes if someone has pmi or a piggy back second mortgage, refinancing may make sense if the can restructure the existing mortgages into one and if the blended rate of their existing mortgages are higher than what the new mortgage would provide.

Do you have a Jumbo mortgage?  Depending on what your mortgage balance is and your current rate, it may make sense to restructure your mortgage into a conforming mortgage.  This can be done by paying down the mortgage at closing or using a second mortgage, such as a HELOC or fixed second.

Would you like access to your home equity?   Refinancing can provide cash for home improvements, college tuition, debt consolidation, or what ever else you wish to do with your equity.   Most cash out refinances are priced higher than a rate term refinance.

Are you getting a divorce or separation?  If you have a mortgage with another person and the relationship is dissolving; you will need to refinance in order to remove the one who's not staying in the home from the mortgage.   Divorce decrees and Quit Claim Deeds do not remove someone's liability from the mortgage.  Plus, it's a huge risk for the person who is no longer staying in the home.   Refinancing to remove an ex-spouse from the mortgage and to cash out their equity is not priced as a "cash out" refinance--it's treated as a rate term refi.

Are you concerned about your home value declining?  Refinances are priced based on loan to value and there are underwriting guidelines that limit how high a loan to value may be.  In "declining markets" lenders have additional restrictions on loan to value lending limits.

Here are some quick "Do's and Don'ts" for your refinance:

• Do get a good faith estimate from your Mortgage Professional.  If you have not heard from your Mortgage Professional since you closed your loan or over the past few months, you might need a new one (they could be out of the business).   
• Do not rely on a simple "rate quote" without knowing the costs involved.
• Do complete a loan application and provide the information your Mortgage Professional needs to lock in your interest rate.
• Do not try to "play the market" and get the lowest rate...it's far too volatile in this climate.   If the rate makes sense, lock it!

Must reads:

Picking your next mortgage by rate shopping?   You might as well be playing liars poker.

I'm happy to adopt your ARM.  No refi required.

 

Don't Wait for the FED on Jan 30th to Refi--It May Cost You

Since I've been saying this over and over again this past week...I thought I might as well blog it too.   PLEASE DON'T WAIT UNTIL WEDNESDAY TO REFI OR LOCK YOUR RATE.   When the FOMC moves the Fed Funds Rate, it does not directly change mortgage rates.  If you have a HELOC (home equity line of credit), when the Fed Funds rate is adjusted your heloc is impacted because the Prime Rate is based on the Fed Funds Rate (Prime Rate = 3 percent plus the Fed Funds Rate).

Mortgage rates may react to the adjustments made to the Fed Funds Rate.  Mortgage rates are not controlled by the Fed.  Mortgage interest rates are based on mortgage backed securities (bonds).  Mortgage interest rates may change often...sometimes several times a day based on trading. 

Often times, if the stock market is doing great, bonds will suffer because investors are pulling funds out of bonds to gain a better return in the stock market.  Therefore, mortgage rates go up in order to attract investors back with a better return.  The reverse is also true.  If the stock market is tanking, investors may seek the safety of bonds, like mortgage backed securities. The result is that mortgage rates will improve as more traders seek their shelter.

Much of trading is based on speculation.  Currently (at least the last report I heard today) traders are anticipating anywhere from a 0.25% - 0.50% cut to the Fed Funds rate on Wednesday.  Again, good news for those of you have a HELOC...not so, perhaps, for those who have not locked in your interest rate and are hoping to close in the next 30-40 days.   When things happen in the market that are not expected (like when the FOMC made the surprise 0.75% cut to the Fed Funds Rate), the market (traders) reacts dramatically for better or worse.   A cut to the Fed Funds rate is all ready priced into the market.  Traders expect it.  If the Fed does not cut 0.25 - 0.50% we will see more volatility with mortgage rates.  (We may have swings in trading whether the FED cuts 0.25% or 0.50% because different "trader camps" are expecting one or the other).      

Wednesday of last week, rates were at a low we haven't seen in years and by the next day, we had popped up 0.5% to rate!  Lenders were inundated with people wanting to refi and many were not able to do so.  I heard from several home owners that they think rates will go down further or that a well-meaning friend thinks this or that with rates.   Please learn as much as you can about how mortgage backed securities work and/or rely on a Mortgage Professional to help guide you through these historic times in the mortgage industry.

This week is heavy duty for data that impacts mortgage interest rates.  Ask your mortgage advisor (who ever you're getting mortgage advice from: a Loan Originator, CPA, friend, family or co-worker) what major events are scheduled to take place this week that may impact mortgage rates?  If they can't answer, should you rely on them for mortgage advice?   

Here's a clue to the answer.

Graph courtesy of Loan Tool Box.   

Follow Mortgage Porter on Twitter

I have been totally impressed watching how Brian Brady has utilized Twitter to keep his clients (consumer and real estate) informed of market trends with Twitter.   He has inspired me to do kind of the same.  I'm not going to give daily lock advice (99% of time, I would encourage you to lock anyway).   

But I will post

• examples of current loan scenarios I've priced or locked to give you a real time idea of the market.
• important breaking news that impacts the mortgage industry.
• what ever else I find interesting...

I'm not sure how exactly how I'm going to use Twitter.   I invite you to be a part of my Twitter beta-group.  Click here.

The market is just moving and changing so quickly, I think it calls for information to be distributed quicker for those who desire that.   Don't worry...I promise won't add a CNBC nano-second ticker on the bottom of my website for the latest breaking news...you will see my Twitter updates on the left side of this blog (under favorite links).

JP Patches Statue Update

Hello Fellow Patches Pals!

As we all know, JP Patches will be celebrating his 50th anniversary of his television show that many of us in the Pacific Northwest watched as tikes to teens on February 10, 2008.   

There is also a statue that has been commissioned of JP and Gertrude that will eventually be in Fremont, the center of the known universe.   I believe the original plans were to unveil the statue on the 50th anniversary...I just received word from a Patches Pal that the big event (statue unveiling) is being pushed back to June.

Meanwhile...Patches Pavers are still available!  Funds are still needed (to the tune of $70k) to complete this project and any excess will be donated to Children's Hospital.    You simply can't go wrong!   If you click on JP's face on the right lower side this blog, you can order your custom paver today.  I will be keeping JP's face on my blog to help raise funds until the statue is complete or the fundraising is done (which ever comes last).    Wouldn't it be wonderful to have the fundraising done by JP's anniversary on February 10th?

P.S.  Patches Pavers make wonderful Valentines Gifts!  Show some love for your favorite clown.

Just for Fun...Jack Block Park in West Seattle

Today my husband and I stumbled upon a park that we probably have driven by at least 100 times!  Jack Block Park in West Seattle on Harbor Avenue.  It's industrial meets Mother Nature with the shipping lanes and Elliott Bay.  Lately a pack of Sea Lions have hanging around too.   What a treat!   We also ventured into Harbor Island...more posts will follow.   Click here for more photos.

Breaking Even on Your Refinance

I'm often asked "how many months will I break even on a refi?"    This is actually something very easy to figure out and worthwhile for anyone who's considering restructuring their mortgage.  In a nutshell, you are taking the non-reoccurring closing costs and dividing the difference between your current mortgage payment and your proposed mortgage payment.   

To determine your closing costs, you are going to consider all fees except for your reserve account and prepaids (taxes, insurance and prorated interest).  This is what you are paying for your interest rate to refinance the mortgage. Your prepaids should not be factored into your closing costs because your existing balance of your prepaids/reserves from your current lender will be refunded to a few weeks after closing the new mortgage.   If you don't wish to have your new reserve account financed into the new mortgage, you can bring cash to the closing table (a majority roll this cost into the new mortgage; but it's totally up to you).  You can also opt to waive your reserve account all together if you meet the criteria, just know that there is a cost to doing this.

Next factor the difference between your current mortgage payment and your proposed mortgage payment.  Ideally, you should look at just principal, interest and mortgage insurance (excluding taxes and insurance).  Divide this figure into the closing costs and you have how many month's it takes to break even on the refinance.

Here's an example from a recent Good Faith Estimate I recently provided a client:

• Current Payment: $1740 less the Proposed Payment: $1550 equals a monthly savings of $190.
• Closing costs (excluding taxes, insurance and prepaid interest (Sections 900 - 1000 on the GFE) are $2390.   2390 divided by 190 equals 12.58 months to break even on the cost of the refinance.

If the borrower is staying in their home for over 13 months, the refinance makes sense.   They are "breaking even" on the cost of the refinance.   If the homeowner was only improving their monthly payment by $50 a month, it would take about 4 years to break even.   Does it still make sense?  This really depends on the individual home owner.  If they're not likely to move and if the rate is low enough to where they're not likely to refi, perhaps it still does.  This is just a tool to help consumers weigh the cost of refinancing.   Different pricing, such as with or without points or without closing costs, will also impact how soon someone will "break even" on their refi.   Watch for a follow up post on that!