TO "LOCK" OR TO "FLOAT"?

It is very important for home buyers or for those who want to re-finance to be aware that in these volatile financial markets we are living in, interest rates on mortgages can fluctuate substantially in a matter of hours! I have heard many stories from mortgage lenders about how they were able to lock a fantastic interest rate for a loan using a 2-3 hour "window of opportunity" that disappeared afterward, or others that missed out because they floated the loan (to "float" means to let the interest rate fluctuate with the market). Understanding how "locking-in" a rate works may help you evaluate your options and could result in thousands of dollars in savings!

So, what is a "lock"? A lock is a GUARANTEE from a lender that if you close your loan within a stipulated time (usually 30 days), the note on your loan (i.e. the nominal interest rate) will be set at a specific interest rate.

When you ask a lender for a quote (also called a "Good Faith Estimate" or GFE), you can ask how long the rate is good for. Bear in mind that until you lock the interest rate, it can (and probably will) change. If you think you need more time to close the transaction, ask the lender for an adjusted rate quote. If you are afraid that interest rates may rise, lock your rate now (rate locks are recommended when interest rates are on the rise, to avoid ending up with higher monthly payment than anticipated). Floating the loan in a volatile market is a gamble - you may win if rates drop, but you may also lose if they go up.

What many people don't know is that long-term mortgage rates don't depend on the inter-bank rates set by the Federal Reserve Bank. This rate normally affects only short-term lending (such as credit cards, car loans, home equity lines, etc.). Long-term rates depend on the behavior of the financial (stock & bond) markets. Thus, if bonds are in high demand, mortgage rates drop.

Professional mortgage representatives are constantly checking the financial markets and related news releases to be able to predict future movements in interest rates. Ask your lender to keep an eye out for a favorable rate to lock in your loan! This is one of the reasons why it is very important to pick a very sharp and experienced mortgage representative (if you ever have the need for one, I can recommend several...)

COMMERCIAL REAL ESTATE - ALSO GOING SOUTH?

Today I was reading an NAR update on Commercial Real Estate (CRE) - it seems that CRE is following the path that Residential Real Estate took two years ago!

Donald Trump just asked for more time to pay his $770 million in construction loans on his Chicago Tower. Many of the leading commercial developers are having difficulties making the payments on their construction loans because absorption has been slower than expected (when the economy slows down = fewer jobs = less need for space).

To add insult to injury, we'll see many banks suffering from defaults in their commercial loan portfolio next year... this is not good news for residential real estate either - more defaults = more restrictive credit for everyone.

On the flip side, Wall Street woes and unpredictability may convince investors that, after all, real estate is a great long-term leveraged investment!

REVERSE MORTGAGE PROGRAM UPDATED

The Daily Real Estate News reported today that the limit for FHA-backed reverse mortgages (or Home Equity Conversion Mortgages - HECMs) had been increased to $417,000.
This new regulation also places a 2% cap on origination fees for the first $200K of the loan amount, or a 1% cap for higher amounts, with a $6,000 limit (adjustable for inflation).
Senior citizens will be allowed to use HECMs to purchase a new property, and lenders will no longer be allowed to sell annuities and other financial products along with the mortgage.
I think this will increase the flexibility for those seniors (like my own parents) who are “house-rich” but “cash poor”. Good move!!

WHAT’S HAPPENING TO THE MORTGAGE MARKETS? (Sept. 18, 2008)

On the positive side, Freddie Mac reported that 30-year fixed rate mortgages fell this week for the 5th consecutive week. According to the Mortgage Bankers Association (MBA), lenders saw a 58 % surge in mortgage applications since August 15th, led by a 122 % surge in re-financing applications. Fixed-rate mortgages are currently the predominant choice (95 % of all new applications) among home buyers. Applications for adjustable rate mortgages (ARMs) have fallen by almost 50 % since the end of last year.

After the government takeover of Freddie and Fannie last week, rates came down substantially (by almost 1%). We are now experiencing very low 30-yr rates (similar to 4 years ago). Definitely a great relief for potential buyers, and a great opportunity for refinancing higher interest loans.

On the other hand, there are a multitude of negative factors affecting the eligibility of buyers to get a loan. The Downpayment Assistance Programs (DAPs), that allowed 100% financing, are disappearing as of October 1st. Mortgage insurance rates are going to be drive (upward, I imagine) by credit scores. And lender underwriters went from one extreme (you just had to fog a mirror to get 100% financing three years ago), to the other (demanding an overwhelming amount of information and questioning issues that verge on the ridiculous for event low LTV loans).

So, on one hand we have great interest rates that should drive demand for housing up. On the other hand, it is difficult to qualify for those loans.

Where are we going? This is my crystal ball: I believe lenders will finally realize that they are in the business of lending money, not just in the business of avoiding losses. If they make it very difficult for buyers, their lending business will die. So they will probably start to relax their guidelines and requirements a little next year. I also believe that inflationary pressures are evident, and when inflation goes up, it affects negatively the stock and the bond markets, so I believe we’ll see mortgage rates creeping back up after the presidential election.

The next six months will be a great window of opportunity for buyers and investors who wish to buy inexpensive properties and get low interest rates. Beyond six months, it is hard to say… In the long term (4+ years), I believe real estate will prove that it is still one of the best and most stable investments around (look at the S&P 500 roller-coaster this week!)

REAL ESTATE JOKE OF THE MONTH

A client bought a new home and the broker ordered some flowers to be sent to him for the occasion. They arrived at the home and the owner read the card; it said "Rest in Peace".

The owner was angry and called the florist to complain. After he had told the florist of the obvious mistake and how angry he was, the florist said:

"Sir, I'm really sorry for the mistake, but rather than getting angry you should imagine this: somewhere there is a funeral taking place today, and they have flowers with a note saying, "Congratulations on Your New Home".

HOUSING AND ECONOMIC RECOVERY ACT OF 2008 - A MIXED BAG!

Although it has been heralded as a piece of "life-saving" legislation for the housing market, The Housing and Economic Recovery Act of 2008 that will kick in on October 1st contains some important provisions that will affect our industry adversely:

1. It eliminates DAP (downpayment assistance programs) that allowed buyers to borrow 100% of the purchase price. While this makes sense from a risk-based analysis point of view (these types of loans defaulted at a much higher rate than loans where the buyer actually puts in a downpayment out of their own money) it does not stimulate the housing industry by restricting first-home buyers, who are the ones supporting the whole housing "food chain". No one disputes that homeowners have more to lose if they have a downpayment, so maybe they will "try harder" to make ends meet when the going gets tough. But a responsible, stable income buyer will be a better credit risk than an irresponsible buyer with a downpayment.
   
   Comment: I believe that this provision will affect the demand from first-home buyers substantially. In this economic climate it is very difficult for a person with moderate to low income to save any substantial amount for a downpayment. A more equitable and fair way of determining default risk and access to use these types of programs would be by looking at the buyer's ability to pay (income & employment history) and financial responsibility track record (i.e. credit scores).
   
   


2. It amends Section 121 of the Internal Revenue Code (which is the exclusion that allows homeowners to sell their qualifying primary residence and exclude up to $250,000 ($500,000 for a couple) of capital gain from capital gains tax. Many savvy investors were combining this exclusion with the 1031 exchange provisions to build up equity via several 1031 exchange transactions, and then convert this investment property to a primary residence to take advantage of the capital gain break. With this amendment, Section 121 no longer permits homeowners to take advantage of the full tax-free exclusion on the sale of a home that was their primary residence if there was a non-qualified use of the property (i.e. investment) prior to being held as primary residence.
   
   Comment: I believe this amendment is just closing a loophole that only savvy investors with high net worth were using, so I am OK with it. However, it will restrict the demand for investment property transacted with investors looking to maximize their tax-free equity, and the sale of homes via 1031 exchanges.
   
   


3. It provides up to $7,500 in tax credits for first home buyers (or individuals who have not owned a home in the last 3 years). While this is being publicized as a "great thing" for our industry, this amount is only an interest-free loan for a 15-year period.
   
   My opinion: People with irresponsible credit behavior will be lured into home ownership by the shine of this tax credit (we are already seeing many volume builders advertising this credit) , will spend the $7,500 on consumer goods when they receive it, and increase their indebtness to the point of default. I believe it is our duty as REALTORS to point out to our clients that they will have to pay this amount back, and strongly suggest that they use the $7,500 instead to pay off high interest credit lines, or principal off their mortgage to shorten the life of the loan, build equity and have some forced savings.
   

ROAD IMPROVEMENTS PAVE THE WAY FOR MAGNOLIA
(Charleston Daily Journal)

Magnolia Development LLC has chosen two general contractors to begin road improvements in the upper peninsula area where it plans to build a large, mixed-use community on about 150 acres of highland. Workers are expected to begin constructing a 1,400-foot bridge and refurbishing three nearby roads next month.