Risk Retention

PMI (Private Mortgage Insurance); most of us have it and most of us hate it. It is a necessary evil of mortgages when you have less than 20% equity in your home.  It affects your monthly payment and b/c of a thing called “Risk Retention” that cost could rise after April of 2011. It is all part of the Dodd-Frank Wall Street Reform and Consumer Protection Act . 

I won’t lie. This is not a glamorous or sexy topic but it is good to keep yourself informed. This information is from Steve Harney and his crew. I thought he gave the best explanation, so best to leave it in his words.

Risk Retention is a new burden for those who securitize mortgages- those entities that bundle closed loans into pools and sell them in the secondary market. These are typically Wall Street style entities. They have little to no direct impact with the consumer, but play a vital role in maintaining liquidity in the housing market. Their role is to replenish the cash available for lenders to lend by buying closed loans from lenders (thereby providing new cash for lenders to lend again).  While it seems that loans guaranteed by the government (FHA, VA, USDA, etc) will have their securities exempt, there is still a huge number of conventional loans (including loans slated for Fannie and Freddie) that will be impacted.

As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, these securitizers will be required to retain an interest in many of the loans. Up-to-now they mostly have just been a pass-through entity. That adds costs to their operations; costs that will have to be passed on to the consumer.

What will be the cost?

Good question! Although this is slated for enactment and enforcement in April, there is no clear definition or direction from the government. The bill talks about retention of 5% of the risk, but what is the risk? We are confident in saying it’s not 5% of the loan amount because typically a lender doesn’t lose all their money in a foreclosure and not every loan gets foreclosed on. There is some sentiment that “risk” might be defined as 2% of the loan amount; and 5% of that would only be 10 basis points, but that would likely mean a 10 basis point hike in mortgage interest rates to capture the additional cost from the consumer. That hurts home buyers, sales prices, and slows recovery.

Understand that everyone is taking educated guesses. We can see scenarios where lender would be almost forced to avoid lower loan amounts which would have an even bigger impact on the areas that fuel recovery- neighborhoods for first-time buyers. If it lowers the number of first timers who become home buyers, it will hurt those sellers who are looking to move up. Higher rates coupled with lenders shying away from lower cost neighborhoods…..bad recipe.

A lack of clarity and a lingering start date are forcing some of the major securitizers to start implementing strategies to protect themselves from a compliance prospective. Many lenders have focused on lobbying for a narrow definition of “risky” loans and have promoted eliminating convention loans that are fully documented with certain credit scores or income documentation, for example.

But, NOT Wells Fargo….

Wells Fargo is on record as proposing that anyone who buys a home utilizing conventional financing with less than a 30% down payment should be required to get Private Mortgage Insurance- a significant increase from the 20% now required. (Having that PMI, would make the loan virtually risk-less for the securitizer.) Of course, that PMI would bring with it additional costs for borrowers and, once again, make buying a home more expensive (in this case for many of the “A Borrowers”).

I want to point out that we are 90 days away from SOMETHING that is going to make home buying more costly and force some renters to stay put. If you are looking to buy, GET MOVING! If you are looking to sell, PRICE YOUR HOME TO COMPEL BUYERS TO MAKE OFFERS. Time is running out. Tick Tock!

Shadow Inventory

If you are watching business news, you have heard the term “shadow inventory” being tossed around. You should know what this means, as this will eventually play a role in determining property value.  It is the inventory of homes “to be”, but not yet released to the market. Today this includes a huge number or foreclosures and short sale properties. See discussions page on Shadow Inventory for data and numbers.

Shadow Inventory is a concept you need to understand when selling in today’s market. As much as we don’t want foreclosures (aka REO property) and short sales to affect our property values, they do. Here are some statistics you need to know:

·         National Association of Realtors has reported over 30% of homes sold in the last few months have been “distressed properties”.

·         Seriously delinquent properties are counted in the distressed sales shadow inventory. Studies show that 98% of all those who fall 90 days behind never catch up and end in foreclosure or short sale.

·         Banks currently hold about 1M in REO’s and roughly 30% of that has made it to the market to date.

·         REO’s and short sales hit all classes of people and loans (Morgan Stanley study):

o   26.3% are subprime loans

o   56.2% are prime mortgages

When you go to sell your home, ask the agent about shadow inventory and foreclosures in your community. Ask to see all the homes currently for sale in your neighborhood and look at the price points.  Are there foreclosures / short sales? Are you going to be compellingly priced against that dynamic?  Everyone wants to sell their home for as much as “they” think it is worth. Please understand that sometimes reality and our beliefs do not coincide.

IT IS THE AGENT’S JOB TO SELL YOUR HOUSE, FOR THE MOST MONEY THEY CAN (GIVEN CURRENT MARKET CONDITIONS) IN THE MOST EXPEDITIOUS TIME POSSIBLE .  THEIR JOB IS NOT TO TELL YOU WHAT YOU WANT TO HEAR AND GET FREE ADVERTISING BY PUTTING A SIGN IN YOUR YARD FOR 6 MONTHS.

If you follow this page, I have armed you with enough knowledge to know when someone is blowing smoke. If you don’t call me to help, make sure you are dealing with a knowledgeable agent. They are out there and necessary in today’s market.

Interest Rates

One factor that can largely dictate whether or not it is a good time to buy real estate is the almighty interest rate! Understanding where they have been and where they are headed is vital in pulling the trigger on buying a house. So, where are they going (UP) and why? 

Interest rates are extremely important when borrowing money of any kind. If you read the previous post on cost vs. price, you know exactly what rising interest rates do. If you haven’t , go back and look at that post. A rise in interest rates of only 1% can significantly increased both monthly and total interest over the life of the loan.

So where were they? Well, rates have been  lower over the last two years that they have been

in decades. If you were buying and the bank was lending you money, they were practically giving it to you. To put it in perspective, in 2000 when I bought my home, interest rates were close to 9%.

Today they are 4.75 roughly. That is almost half! What a difference that made when I refinanced!

Where are they headed and why?  They are headed north my friends. I won’t sit here and tell you that I have a crystal ball or an inside track to the fed.  But I do subscribe to some real estate economist organizations and from what I read, 2011 will be volatile. Don’t expect to see 3% or 4% jumps b/c that is not likely to happen. We will probably bounce around between 4.75 and 5.55 most of the year. I have also heard by the spring of 2012 we will be at or above 6%.  It does not sound like much, but remember, even a .75% increase will raise your home loan by 8% on a monthly basis. Here are some things that affect the mortgage interest rates:

·         Inflation = bad for rates

·         More jobs is inflationary = bad for rates

·         Strong stock market = bad for rates

·         Weak dollar  = bad for rates

·         Consumer confidence is good for stock = bad for rates

Bottom line is that you get more for your money when rates are low. Look at what you can afford at today’s rates and do the math on a 1 to 1.5% increase in interest rates.  That will give you the best picture on whether or not you need to act sooner or can afford to wait until latter.