Many believe that very few houses are selling and that almost no one can get a mortgage. We want to let everyone know that neither of these assumptions is true. Recently, the National Association of Realtors (NAR) released their Existing Homes Sales Report. According to the report there are, on average, 12,109 homes selling in the United States EACH and EVERY DAY! That means that approximately 12,000 houses sold yesterday, approximately 12,000 will sell today and approximately 12,000 will sell tomorrow. So the thinking that homes aren’t selling just isn’t true.

Another interesting fact in the report was that 72% of these transactions were accompanied by a mortgage. That means that approximately 8,719 people qualify for a mortgage on a daily basis in this country.

There are over 12,000 homes sold and over 8,000 mortgages granted every day. The real estate market is doing better than many believe.

It’s the time of year that we look ahead and attempt to give our best guesses about the market, the industry, and the effects they may have. So, here are my thoughts about the mortgage world:

Interest Rates Should Be Stable

With a faltering economy nationally and worldwide, including pessimistic estimates for employment, there is little chance that the Fed will risk increasing rates which would jeopardize any recovery. Couple that with a Presidential Election in November and conventional wisdom says we’ll see rates hovering in the same neighborhood for most of 2012.

Mortgage Costs Will Increase

Quietly tucked away in those bills passed in Congress to extend the payroll tax cuts before the holidays was an increase of 10 basis points in the guarantee fees on loans sold to Fannie Mae and Freddie Mac. That will translate into .10% higher interest rates (which would be $4000 extra on a $200,000 loan over 30 years). Interestingly enough, the additional revenue is not going to Fannie or Freddie to help with defaulted loans, but rather going to the US Treasury to make up for the payroll tax cut….go figure.

The Mortgage Interest Deduction Will Be Challenged

Look for people of a certain income level to lose their write off as a measure to increase revenue. Taking away from the wealthy as a way to raise governmental revenue is politically strategic. It is unlikely everyone will lose the deduction (political suicide), but that top 1%…watch out.

Loan Products Will Expand

Common sense lending will start creeping back. Large down payments will liberalize credit and income standards. This will likely begin with local banks who are comfortable with appraised values. I’m not calling for a return to the madness, but some loans that are low risk are not being done today. Anticipate some lenders expanding their guidelines.

Don’t be shocked by a lowering of FHA loan limits and/or an increase in the FHA Up Front Mortgage Insurance Premium either. Overall, mortgages should give people more reasons to buy homes in 2012 as the economic recovery is strongly tied to housing. Given that most people vote their own personal economy rather than policy beliefs, I expect support by those who are looking to be re-elected.

The federal government is reconsidering their involvement in the home mortgage process. They plan to still ‘guarantee’ certain mortgages. However, they appear to be redefining what they consider a ‘qualified purchaser’. They are discussing stricter lending guidelines in four different areas:

1. The type of mortgage
2. The minimum down payment
3. The debt ratios of the buyer
4. The FICO score of the purchaser

Today, we want to look at #1.

It appears that there is at least conversation about eliminating the 30 year fixed rate mortgage which has been a staple in this country’s housing industry for some time. Some in government want to duplicate the mortgage process of other countries. In Canada, for example, they don’t even have 30 year fix rate mortgages available. The vast majority of Canadian home loans have a 25 year payout but the interest rate is renegotiated every five years. If rates go down, you will wind up with a lower rate. If rates go up, you end up paying a higher rate. If you want a fixed rate mortgage for 25 years you pay a rate approximately two percentage points higher than the going rate at the time of your closing.

Would the same happen in this country? Last week, Housing Wire quoted Janis Bowdler, senior policy analyst at the National Council of La Raza:

“Without some form of Fannie Mae and Freddie Mac, replacements to support these popular loans, many first time borrowers will be shut out.

“Without that guarantee lenders would not offer 30-year fixed-rate mortgages, at least not at rates the average person could afford. Yes, some would be available but not for the average family but for those with a large amount of inherited wealth they can put to a large down payment.”

Why Is This Important?

You probably want to set your housing expense at the lowest number possible for the longest time possible. This may be the appropriate time to lock-in your long term housing expense as three things seem possible, if not likely, in the future:

• Mortgage rates will increase from current historic lows
• The 30 year fixed rate mortgage may disappear
• Rents will return to historic norms of 3% annual increases

Bottom Line

If you want to purchase a home of your own but are waiting to see where prices will go, consider what you could be giving up while you wait.

As underwriting guidelines for lenders become more stringent, we need to re-examine what a good mortgage application looks like. As home buyers begin their search for a home, there are a few items they should be aware of that they can do to help get their loans approved (with the best possible terms), and, at the same time, lessen some of the stress that goes along with the mortgage process.

1. Income documents

Most lenders want to see a full month of paystubs and two years’ complete Federal Tax Returns. Assembling them ahead of time and holding on to every paystub you get is a good idea even before you find a home and/or submit your mortgage application because it will save you time later. Moreover, looking at those documents and being prepared to explain any deductions that show up is crucial. Child support, alimony, garnishments, and Unreimbursed Employee Expenses are often crippling factors that, if explained and dealt with upfront, can make your loan approval smoother.

2. Asset documents

Most lenders will scour your bank accounts for the two months prior to going to contract. They are looking for large deposits because large deposits can signal a new loan that wouldn’t show up on your credit report yet. What’s a “large deposit”? Typically, any deposit that would represent more than your income can support. If you make $5000 a month, after taxes you likely net $3800 (or $1900 a bi-weekly pay period). Therefore, deposits in excess of that will need to be explained and documented. Sold a motorcycle? Have a paid receipt and motor vehicle documents in place. Received a gift? You will need a Gift Affidavit, proof of the donor’s ability and transfer of the funds. Any and all questions should be discussed with your loan officer.

3. Credit Score Optimization

Do your best to curtail your use of credit as it relates to your available credit lines. Target a cap of 30% of usage of available lines to get the best scores. Do NOT cancel credit cards. That will lower your amount of available credit, thereby raising your percentage of usage. That will damage your score. Do NOT shop for a car, explore life insurance, apply for a new credit card or increase the limits on your current cards because the running of your credit by people in other industries will also lower your credit score. Most importantly, don’t do anything that will require having your credit run without first discussing it with a mortgage professional who knows the impact it could have.

4. Appraisal Concerns

It’s unlikely you will make an offer to purchase without checking out comparable home sales. It’s also likely you received that type of data from the real estate agent you are working with. Make sure your agent prepares the same information for the appraiser. Data about similar sales, similar homes currently on the market and maybe even cost estimates for any repairs or improvements anticipated can preempt future problems with appraised values and conditions.

Overall, it is recommended that you hold onto copies of everything financial, think before allowing your credit to be run and work with an agent and loan officer who can use their experience to put your loan application in its best possible light…as soon as you start thinking about buying a home.

InfoGraphic

We are enjoying extremely low interest rates, for sure. With the global economy, the national economy and unemployment where they are, no one is predicting a dramatic change in rates any time soon. BUT, on Monday, the Obama Administration floated out some interesting proposals they are considering through the Acting Director of the Federal Housing Finance Agency (FHFA), Edward DeMarco. It appears that two significant changes in housing financing are on the table.

You should know that FHFA is the new regulator that is overseeing the restoration of viability of Fannie Mae and Freddie Mac. They are charged with reducing the risk on loans delivered to the GSEs in order to protect the U.S. taxpayer.

In a speech this past Monday, Mr. DeMarco mentioned two potential changes:

Increasing the role of the private sector to lessen the risk held by the public sector.

The method mentioned was increasing the insurance coverages assumed by the PMI (Private Mortgage Insurance) companies. One result could be higher insurance rates for loans where customers put less than 20% down. The second wrinkle is potentially more damaging…the idea that PMI coverage may be required on loans with 21%-25% (maybe even 30%) down! Clearly, this is an attempt to get more fee income to the MI companies to entice them to remain viable and continue to serve those with less than 20% down. Regardless, the net result is that more people will have to pay more money for private mortgage insurance. “How much?” and “To what extent?” is yet to be defined; however, more costs to more people is bad.

Adjusting fees.

Recognize that the GSEs charge fees. Explaining what they are and why they exist is a topic for a different day. Suffice to say, today, fees are fairly standard geographically speaking. Mr. DeMarco is talking about adjusting the fees (i.e., increasing them) for areas that have proven more risky. This proposal means the hardest hit areas will have the most difficult time recovering because the increased fees always get passed on to the consumer. Rather than “spread the risk”, FHFA is talking about punishing the defenseless.

The predictable outcome of these “strategies” is higher costs to the consumer which makes buying a home more expensive. As costs go up, desire to buy goes down (as does the borrower’s ability to be approved for a mortgage).

Message: Buy sooner rather than later!