Tax Credit Extension Would Allow Three More Months to Get Credits.

To qualify for the credit, buyers had to be under contract for a purchase by April 30. But under current law they have until June 30 to close on the sale.

Under the amendment, they would get an extra three months to close — useful for those who are experiencing delays in getting their mortgages approved or are somehow being affected by the many other issues that can arise and prevent a closing from occurring on time. The amendment would apply solely to buyers who entered a purchase contract by April 30.

"Because of this program's popularity and the time it takes to complete transactions such as short sales, I led the effort today to extend the closing deadline for this tax credit through September of this year — allowing lenders more time to clear a backlog of 180,000 potential home buyers nationwide," said Senate Majority Leader Harry Reid, in a news release after the amendment passed in the Senate this week.

The house had passed their own bill earlier in the year and now the two must iron out their differences.

My Take: Mixed

The Home Buyers tax credit was undoubtedly the shot in the arm that the housing market needed at the time.  Part one of the program which ended in November of last year, and the extension through this April which also added a credit for current homeowners was very successful. 

The reason stated to request an extension of the payout deadline was a backlog of thousands of mortgages that could not close on time.  Specifically noted where short sales and foreclosures. To take the first point regarding a backlog of volume, I completely disagree.  I consider 2005 to be the height of the bull market for real estate.  From January 1, 2005 to June 22, 2005 we had 4134 single-family homes at the closing table.  The same time this year there were just 3216.  So in Rhode Island's case anyway, it wasn't because of an incredible burden of volume.

Regarding short sales and foreclosures and the desire to give extra time to collect because of the delayed closings; I personally think that risk is part and parcel of buying such a property.  It is disclosed from the beginning that the closing date on a short sale or foreclosure is absolutely not written in stone.  People take the risk of a short sale or foreclosure because they are buying a property below market value.  The risk is the uncertainty of the closing date.  In my opinion the buyer has already been compensated, and fully knew the risks of going into contract on this kind of property.

We can do more with this money.

Adjustable Mortgage Rates Down As Well – Good News!

According to Freddie Mac, the 30-year fixed-rate mortgage averaged 4.93 percent with an average 0.7 point for the week ending May 13, 2010. This rate is down from last week when it averaged 5.00 percent. Last year at this time, the 30-year FRM averaged 4.86 percent. The 30-year FRM has not been lower since the week ending December 10, 2009, when it averaged 4.81 percent.

The 15-year FRM this week averaged 4.30 percent with an average 0.6 point, down from last week when it averaged 4.36 percent. A year ago at this time, the 15-year FRM averaged 4.52 percent. The 15-year FRM has not been lower since the week ending December 3, 2009 when it averaged 4.27 percent.

The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.95 percent this week, with an average 0.6 point, down from last week when it averaged 3.97 percent. A year ago, the 5-year ARM averaged 4.82 percent. The 5-year ARM has not been lower since Freddie Mac started tracking the 5-year ARM in January of 2005.

My Take:

This continued suppression of mortgage rates is extremely good fortune besides the obvious opinion that lower mortgage rates are good for the real estate economy. 

A tremendous catalyst in the real estate debacle that began a couple of years ago was the rolling over of adjustable-rate mortgages.  If you consider the height of the real estate market to be the years between 2004 to 2005 when a plethora of these adjustable-rate mortgages were born, then looking at the years in which they began to adjust is not only an important history lesson but a forecaster for the future as well.  It's no coincidence that the majority of the foreclosures hit the market in 2007 to 2008 when people could no longer afford there now higher mortgage payments (3 year ARM) coupled with a downturned economy.

Fortunately the second wave of these adjustable arms (5 year ARM) is coming do now in 2010 where the adjustable rate is actually lower than the initial rate in most cases. Consider it a bullet dodged.  For many people it's just like getting a slight loan modification or refinance.  Even if it amounts to just a few hundred dollars per month, that is often just enough to keep heads above water while the economy rebounds.

Mortgage Rates Actually Dip by the End of the Quarter

For the first time in nearly six months, Fannie Mae is imposing strict, new guidelines on American homeowners.  This time, the hardest hit demographic is owners of 2-unit homes.

In its official announcement, Fannie Mae listed the following changes to its 2-unit financing programs, separated by occupancy type.

Primary Residence:

• Purchase: Maximum loan-to-value drops to 80%; FICO minimum score now 640.
• Rate Refinance: Maximum loan-to-value drops to 80%; FICO minimum score now 640.
• Cash Out Refinance: Maximum loan-to-value drops to 75%; FICO minimum score now 680.

Investment Property:

• Purchase: Maximum loan-to-value drops to 75%; FICO minimum score now 660.
• Rate Refinance: Maximum loan-to-value drops to 75%; FICO minimum score now 660.
• Cash Out Refinance: Maximum loan-to-value drops to 70%; FICO minimum score now 680.

With Fannie Mae’s new loan-to-value limits falling by as much as 15 percent, it’s a certainty that fewer 2-unit homeowners will be approved in the mortgage process. This could slow both purchase and refinance activity in the coming months.  What it does, then, by limiting the number of possible buyers is depress the home prices.  This we do not need!

However, while Fannie Mae recommends that lenders institute the new policy immediately, September 1, 2009, is the “effective date”.

Therefore, if you plan to buy a 2-unit home, or if you own one and know you’ll need to refinance it soon, it may be a good idea to move up your timeframe.  Lenders could implement the new guidelines at any time up until September 1. So please check with your lender to see where they stand.

The volume of mortgage applications filed last week rose 10.9% from the week before, spurred by a surge  in refinancings.

Applications to refinance existing home loans rebounded 15.2% for the week ended July 3, while applications for mortgages to purchase homes also increased, up 6.7%.

Overall, the pace of mortgage filings recovered from the week ended June 26, when refinancings had weakened to their lowest level since last November.

Refinancing applications made up 48.4% of all mortgage activity, up from 46.4% the week before, while adjustable-rate mortgages accounted for 4.4%, up from 4.3%.

According to the most recent survey, 30-year fixed-rate mortgages carried an average interest rate of 5.34% last week, unchanged from the week before.

To obtain this rate, the mortgage required payment of an average 1.13 points. A point is 1% of the mortgage amount, charged as prepaid interest.

Fifteen-year fixed-rate mortgages averaged 4.83% last week, up from 4.81% the week before; the mortgage required payment of an average 1.06 points to obtain the rate.

As recorded by Freddie Mac, since 2006, 30-year fixed-rate conforming mortgage rate have made a habit of rising in May, June, July and August before settling down through football season.  This year, the “June Swoon” looks especially strong.  Mortgage rates are higher by 3/4 percent versus late-May and we’re only at the start of the summer trend.

The biggest reason why mortgage rates are up is because of inflation fears.  Inflation devalues the U.S. dollar and renders fixed-rate investments — a set that includes mortgage-backed bonds — become less attractive to investors. When the dollar is worth less, bond repayments are worth less, too.   This is why traders don’t like holding mortgage bonds in their portfolios when inflation looms — it can be a real money-loser.  So, mortgage bonds tend to sell-off when inflation is coming which, in turn, causes mortgage-backed bond prices to fall.

Bottom line for cocktail party conversation: Lower bond prices yields higher mortgage rates.

Rates for 30-year home loans fell back this week after soaring to the highest level in seven months a week earlier.  The average rate for a 30-year fixed mortgage was 5.38 percent this week, down from 5.59 percent a week earlier.

Rates had risen for three consecutive weeks after yields on long-term government debt, which are closely tied to mortgages rates, had been climbing as investors worried that the huge surplus of government debt hitting the market could trigger inflation.

But data released Wednesday suggested that inflation remains largely in check.  Though there are signs that the troubled U.S. housing market is beginning to stabilize, higher rates could threaten or slow down any recovery, since borrowers would be able to borrow less money and might decide to hold off on their purchases.

Simply put, buyers have a certain amount of money they can afford to spend.  If interest rates shoot up, then house prices will have to fall to make up the difference.  The three-week run-up in rates started to slow home buyer demand.

The FBI, Justice Department, Secret Service and Postal Service will get a combined half a billion dollars to investigate and prosecute those who engage in mortgage fraud.  President Obama signed the legislation May 20.  Important to remember; Rhode Island leads the nation in mortgage fraud.

The targets range from people who lie about their incomes on home mortgage applications to highly organized roving networks of “foreclosure relief” scammers who bilk money out of homeowners seeking mortgage modifications.  More on these gems of humanity in future posts.

Known as the Fraud Enforcement and Recovery Act of 2009, the legislation will fund new SWAT teams of fraud-busters and broaden federal legal powers to go after individuals and mortgage operations that currently get attention — if at all — only at the state or local levels.

The law also creates a Financial Crisis Inquiry Commission with broad powers to investigate who and what got us into the real estate mess, starting with the subprime boom, Wall Street hanky- panky and more recent bank failures.
How bad is mortgage fraud? The Treasury Department estimates it causes losses to consumers and the mortgage industry of anywhere from $15 billion to $25 billion a year. FBI Director Robert S. Mueller III told Congress his agency’s mortgage fraud caseload has tripled in the last three years.

Reports of potential fraud filed with the Financial Crimes Enforcement Network exceeded 65,000 in 2008 — up from about 25,000 in 2005 and just 5,400 in 2002. Officials say the recession and the end of the housing boom have actually stimulated more fraud rather than the reverse.

What do these frauds look like and where are they occurring? The Mortgage Asset Research Institute performs an annual study of the problem for the Mortgage Bankers Assn., and its 2009 report found:

* Roughly two-thirds of all frauds involve deceptions at the application stage. For example, some borrowers tell the lender they plan to occupy and use the property as their main residence, but they really plan to turn it into a rental unit. That ruse often gets the applicant a lower rate on the loan, but it’s a violation of federal law.

* About 28% of frauds last year involved deliberate misinformation about tax returns or financial statements. Fake IRS filings can be created with readily available software programs, and documentation of financial assets can be manipulated as well. Around 21% of fraudulent applications contained faked deposit verifications last year.

* Appraisal shenanigans rank high as well and were involved in about 22% of fraud cases in 2008. Appraisal fraud — typically inflated valuations intended to squeeze more mortgage money out of the lender — may well be more commonplace than the official statistics. That’s because many overvaluations are modest enough to avoid detection, but large enough to get the loan closed, thereby increasing subsequent risk of loss to the lender.

* Other widespread forms of home loan fraud include faked employment verifications, misinformation on closing or escrow documents, and credit reports or scores that have been manipulated in some way to get unqualified borrowers approved, or lower interest rates, or both.

Freddie Mac released the results of its Primary Mortgage Market Survey  in which the 30-year fixed-rate mortgage averaged 4.78 percent with an average 0.7 point for the week ending April 2, 2009, down from last week when it averaged 4.85 percent. Last year at this time, the 30-year averaged 5.88 percent. The 30-year has not been lower in the life of Freddie Mac’s weekly survey, which dates back to 1971 for the 30-year fixed rate mortgage.

The 15-year fixed rate this week averaged 4.52 percent with an average 0.7 point, down from last week when it averaged 4.58 percent. A year ago at this time, the 15-year averaged 5.42 percent. The 15-year  has never been lower in the life of Freddie Mac’s weekly survey, which dates back to 1991 for the 15-year fixed rate mortgage.

The average U.S. rate on a 30-year fixed mortgage fell to 4.98% this week as the Federal Reserve announced it would double purchases of mortgage debt as part of its effort to lower rates and lure home buyers to the market.  This is part of the Fed’s $1.15 trillion plan to buy up bonds.

Conversely, the dollar took a beating yesterday against key European counterparts; euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona.   The dollar dropped 2.7 percent as investors feared the repercussions of this action. It was the steepest one-day fall in nine years.

My Inflation 101 Manual says if there’s too much of one thing, it’s worth less.  Simply printing a trillion dollars up and dumping it into the economy band aids a problem while creating a far greater one.  Now the dollar isn’t worth as much.  Had things just been left alone, we still would have had fantastic mortgage rates and a US dollar that  had previously strengthened during the economic downturn as demand for safe and reliable U.S. Treasury bonds shot up with the stock market tanking.