San Fernando Valley Real Estate Blog

Mortgage rates are higher after the Federal Reserve released the internal notes of its September 22-23, 2009 meeting, known as the "Fed Minutes". The Fed Minutes are the lengthier version of the more famous, succinct post-meeting press release. The extra level of details in the Fed Minutes gives Wall Street clues about what the Federal Reserve is going to do next.

The minutes revealed that the economy may improve even faster than previously expected. In the past week, multiple Federal Reserve members hinted that the Fed Funds Rate may rise as early as April 2010. Fed Chairman Ben Bernanke even alluded to it, too.

These acknowledgements are part of the reason why mortgage rates are up. The Fed Funds Rate rises to accommodate a growing economy, because the prospect of economic recovery is drawing money into the stock market and away from mortgage-backed bonds. Less demand for bonds means lower prices which, in turn, leads to higher rates.

According to the government, home values edged lower last month. The Federal Housing Finance Agency's Home Price Index report shows values are down by 0.3 percent from the month prior. The FHFA Home Price Index is based on the value of homes financed through Fannie Mae or Freddie Mac. The FHFA Home Price Index is more of a "national" real estate index than its private-sector cousin, the Case-Shiller Index.

The Home Price Index doesn't account for homes meeting any of the following descriptions:

1. Is considered new construction

2. Is a multi-unit property

3. Is financed by an entity other than Fannie Mae or Freddie Mac.

Because of these exceptions, some analysts label the Home Price Index incomplete. The same could be said of every method of home valuation, however. Case-Shiller only collects data from 20 markets, for example.

In light of these shortcomings, what's most important is to recognize that both of the "popular" home valuation reports show similar patterns -- home prices have leveled and are showing signs of a rebound. For a region-by-region breakdown of the Home Price Index, visit the FHFA website.

Crude oil is at its highest levels since October 2008, with retail gas up 8 cents per gallon this week. This is bad news for home buyers and mortgage rate shoppers. The same force that's driving oil higher is linked to rising mortgage rates. We're talking about the weakening U.S. Dollar. The dollar is now at its worst levels versus the Euro in 15 months .

When the dollar loses value, more of them are needed to buy the same barrel of oil. As a result, the price of crude oil goes up. There are other reasons why crude oil is rising, but the fading U.S. dollar is one of the major ones.

The dollar has a similar impact on mortgage rates. Mortgage rates are based on the price of mortgage bonds. As the dollar loses value, so do mortgage bonds. This causes demand for bonds to drop and prices on bonds to fall. Because bond prices and bond rates move in opposite directions, mortgage rates rise and this is precisely what's happening on Wall Street today.

Since touching a 5-month low in early-October, mortgage rates have raised as much as 1/2 percent, depending on the product. Moreover, with the dollar showing no signs of a rebound, the upward pressure on rates should continue.

And your everyday signal that rates are rising? Just check your price at the pump. If gas prices are up, it's likely that mortgage rates are, too. If you're trying to time the market bottom, you may have already missed it. Consider locking your mortgage rate before rates increase even more.

Momentum in the housing market is overwhelmingly positive; homes under contract are soaring, national home supplies are way down, and home values are up in a lot of markets.

A "Housing Start" is a home for which the foundation has been excavated. The most recent Housing Starts graph for single-family homes shows gains for last month, marking this the 8th time that's happened this year. Overall, Housing Starts are up 40 percent for this year. September’s data suggests that the housing market has stabilized.

Despite the positive news, media outlets are calling September's Housing Starts data a "bummer", citing a drop in monthly building permits, which might suggest that housing will slow in the months ahead. The probable cause for fewer permits isn't that the housing market is overdone, it's that home builders are choosing to exercise caution because the expiration of the First-Time Home Buyer Tax Credit is coming due and there is a growing number of foreclosed homes. It's unclear what housing demand will be in December and the last present a builder wants for the holidays is an excess of inventory.

Looking back at February of this year, there's a host of signs that housing is on the path to recovery. Now, that path won't be a straight line and there is bound to be setbacks, but September's Housing Starts is not one of them.

For the seventh consecutive month, foreclosure activity in the U.S. occurred in just 4 states. RealtyTrac.com reported that more than half of September's foreclosure-related activity occurred in California, Florida, Nevada and Michigan, which make up 22.05 percent of the total U.S. population. In these states, foreclosures are up 29 percent from September 2008. While the data seems negative, these defaults are creating some interesting buying opportunities.

Foreclosed homes often sell at a discounted rate compared to non-foreclosed homes. Cheap prices, low mortgage rates and willing buyers have helped to spur home sales in many U.S. markets. In August, "distressed homes" accounted for one-third of all existing home sales . With that said, buying foreclosures isn't for everyone.

Foreclosed homes are often sold "as-is" and may be in move-in condition, or may be inhabitable. If the property requires a lot of work, it is important to get estimates in order to make the home livable. After reviewing the estimates, the home may not seem like such a "steal" after all.

Buying a home in foreclosure is fundamentally the same as buying a "regular" home -- there's a contract and a closing. But most of the steps in between are different.

A new, simple to read, Good Faith Estimate will make its debut on January 1, 2010. Legislators responsible for the new Good Faith Estimate want it to be simpler for homeowners and home buyers to understand than the former version. The new Good Faith Estimate has plain-English explanations of every fee, charge, and interest payment involved in a purchase or refinance.

The new Good Faith Estimate uses a series of "Yes/No" checkboxes on the first page (the old form had this information spread across 3 different forms), for questions such as:

• Whether the interest rate can change over time
• Whether the loan carries a prepayment penalty
• The length of the rate lock

The new Good Faith Estimate simplifies rate-and-fee comparisons, showing applicants how a lower rate can be available for a higher set of fees, and vice versa. It also includes a section called "The Shopping Cart" in which applicants can compare lenders’ prices and rates.

With all the improvements made, the new Good Faith Estimate is not able to address the issue of "suitability". As in, is this the right loan for the right borrower? That requires the skills of a professional loan officer who can both listens to your needs and helps you plan for them. Great terms on an unsuitable loan are often worse than "good" terms on the right one.

According to the Freddie Mac weekly mortgage rate survey, the relative cost of a 5-year ARM is dropping versus its 30-year fixed-rate cousin.

During the first 5 months of 2009, the products ran neck-and-neck. Today, they're a half-percent apart.

On a $200,000 home loan, that's a difference of $60 per month.

Adjustable-rate mortgages aren't for everyone, but for the right household, they can be a terrific fit.  A few scenarios that warrant consideration of a 5-year ARM include persons:

1. Buying a home with an intent to sell within 5 years
2. With a 30-year fixed mortgage and plans to sell within 5 years
3. Interested in low payments and comfortable with longer-term interest rate and payment uncertainty

Additionally, with homeowners with existing ARMs may want to consider taking on a new ARM, if only to extend their initial, fixed rate period.

Before choosing an ARM, make sure to speak with your loan officer about how adjustable-rate mortgages work, and what causes them to adjust.  Although conventional ARMs are limited in how far they can adjust, it's important to know the risks.

An escrow account is a designated savings account into which funds get deposited for a specific purpose.

With respect to real estate and home loans, escrow accounts are used to pay real estate tax bills and homeowners insurance payments.

Escrow accounts are managed and disbursed by lenders.

When a homeowner "escrows" his mortgage, along with his scheduled monthly mortgage payment, he must also send an additional payment to the lender equal to 1/12 of the home's annual real estate tax bill plus 1/12 of the annual homeowners insurance bill.

By sending a pro rata portion of the tax and insurance bill each month, the homeowner's escrow account will always, in theory, have enough funds to make payments in full as tax bills and insurance premiums come due.

Beginning November 17, 2009, the FHA will make it harder to qualify for its popular Streamline Refinance program.

Available exclusively to homeowners with existing FHA home loans, the streamline program is meant to help homeowners reduce mortgage payments as simply as possible.

As such, the program carries minimum eligibility requirements.

In fact, the FHA Streamline Refinance is more notable for what it doesn't require from applicants.

• There's no income verification
• There's no asset verification
• There's no employment verification
• There's no appraisal required

The two biggest qualifiers, really, are that the homeowner meets a minimum credit score and that the new loan doesn't exceed the original balance of the old loan.

The new program guidelines, however, are much stricter. 

Effective next month, among other requirements, applicants must show evidence of employment and income, plus proof of cash required at closing. 

Furthermore, homeowners can't finance closing costs into the mortgage without a complete home appraisal.  In areas of declining value, this may render refinancing with the FHA impossible.

Therefore, if you're a homeowner with an FHA mortgage, consider contacting your loan officer before the November 17 deadline to explore your Streamline Refinance options.  Mortgage rates are low and you never know for what you'll qualify.

The worst thing you can do is to wait too long to find out.  Once the deadline passes, the old guidelines will be history.

Buoyed by a generous tax credit, affordable homes, and low mortgage rates, the Pending Home Sales Index posted its seventh consecutive monthly gain in August.

It's the longest winning streak in the index's history and the highest reading in 2-1/2 years.

It's also another signal that the housing market is in recovery.

"Pending home sales" are a forward-looking indicator, measuring the number homes under contract to sell, but not yet closed. 

Historically, 80% of homes under contract close within 60 days.  Most others close within 120 days.

It's no wonder home values are rising in so many markets.

Home buyers -- take note.  If you're plan to purchase a home between now and the New Year, expect that the recent run in pending sales will turn into run of closed sales which, in turn, should pump prices up and drop home inventory.

With mortgage rates hovering near 4-month lows, the best way to find a value in housing may be to act sooner rather than later.

The government's First-Time Home Buyer Tax Credit program expires November 30, 2009 -- a scant 60 days from today.

Considering it can take up to 60 days to close on a home, first-time buyers have 2 weeks at most to find a home.

Buyers not under contract by October 15 have little chance of meeting the November 30 deadline and, therefore, little chance of claiming the tax credit.

This is especially true for purchases involving short sales and foreclosures.

Congress passed the First-Time Homebuyer Tax Credit program as part of the 2009 economic stimulus plan.  IRS Form 5405 outlines the program criteria which include the following stipulations:

• Buyer may not have owned a "main home" in the past 36 months
• The home may not be purchased from a parent, spouse, or child
• Adjusted gross income for the household must be below $95,000 for single tax filers and $170,000 for joint tax filers

The credit is capped at $8,000 or 10% of the purchase price, whichever is less.  And don't forget -- the First-Time Home Buyer Tax Credit is a true tax credit. It's not a deduction.

This means that a tax filer who claims the full $8,000 and whose "normal" tax liability is $5,000 would receive $3,000 cash from the US Treasury when their tax return is processed by the IRS.

If you can't close by November 30, 2009, though, you can't claim the credit.

The clock is ticking. If you're planning to use the First-Time Home Buyer Tax Credit, the time to act is now.

For the second month in a row, 18 of the 20 Case-Shiller real estate markets posted higher home values.  It's the 6th consecutive strong showing for the benchmark private-sector housing index.

Combined with falling home supplies and rising sales figures, this month's Case-Shiller Index suggests that housing may have bottomed sometime earlier this year.

It's cause for optimism.

Even Case-Shiller respresentatives seem excited. In its press release, the publishers singled out the index's winning streak, commenting on the recent "stabilization in national real estate values".

But, in that statement, we see the Case-Shiller Index's biggest flaw.  The index ipurports itself to be a national real estate metric but, in reality, there is no such thing as a national real estate market.

All real estate is local.

The Case-Shiller Index reports home values for 20 U.S. cities.  Each of those cities, however, is comprised of smaller neighborhoods, each with its own character, desirability, and price points.  Case-Shiller attempts to lump it all together -- an impossibility.

As an example, New York City posted a nearly 1 percent increase in July but that figure is just a city summary.  The actual market in three distinct neighborhoods -- Upper East Side, Chelsea, and Flatbush -- vary tremendously.  Not to mention Long Island, too.

Flaws aside, though, Case-Shiller is still important.  It helps to identify broader trends in housing and housing may hold the key to our economic future.

With July's Case-Shiller Index, we see that the housing market's recovery is being sustained.

Getting approved for a mortgage is about to get harder.

For the second time in less than 3 months, Fannie Mae announced changes to its mortgage guidelines. 

In its official announcement, Fannie Mae details the updates, meant to reduce the mortgage firm's overall risk.

The first major change is with respect to credit scoring.  All Fannie Mae loans -- whether underwritten electronically or manually -- require a 620 credit score minimum.  There are very few exceptions.

A second change relates to loans with private mortgage insurance.  Homeowners whose loan-to-value exceeds 80 percent now have a choice:

1. Accept higher mortgage insurance premiums month-after-month
2. Accept a one-time fee paid at closing to compensate for higher risk

Both options pass higher costs to consumers.

Then, a third change relates to maximum debt-to-income ratio.  As announced in a separate document, Fannie Mae will no longer approve expense ratios exceeding 45 percent except with very strong assets and credit to back it up.  In no case can expense ratios exceed 50 percent.

There are other changes, too, including the elimination of seldom-used mortgage products and new risk-based pricing on "expanded level" approvals.

Fannie Mae implements its updates during the weekend of December 12. 

Therefore, if you're going to need (or want) a new mortgage later this year, consider moving up your timeframe to October or November.  Once the guidelines change, getting approved for a mortgage is going to be tougher.