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.

Cost vs. Price

Everyone tells you, “It’s the best time to buy”.  If you are a seller, especially, you are wondering if people have lost their mind. To understand, you have to know the concept of cost vs. price. This is how taking $10k to $15k less (than you think it is worth)  on your current home  could save you $80k on the next home you buy.

Cost vs. Price

This is a relatively easy concept once you understand it and it will open your eyes to the incredible opportunity presented to us in the current market.  This market is great for move up buyers and buyers who have a lot of equity in their current home. (Let’s not fail to mention those exceptionally smart individuals who save and have money to put down aside from sale proceeds of a home.)

It  is a simple concept that works like this;

I have a home worth $150k in today’s market. It WAS worth $165k two years ago. I want to  move,but I want what I (note this has nothing to do with what it is actually worth at the moment) think my home is worth. So, I think I will wait another 1.5 years for the market to inch up a little. Basically, I want my $15k back. 

I want a house worth $350k. Today interest rates are 4.75%. With a 10% down payment I would finance $315k for 30 years with a P&I payment of $1,643.19 a month. This equates to $276k in interest over the life of the loan.

                Remember…I am waiting to get my $15k back

It is 1.5 years later and I got my $15k back on selling my house.  But now interest rates have risen to 6%.

·   That $350k house with a 10% down payment (finance $315k) at 6% interest has my monthly P&I at $1,888.58. This equates to $364k in interest over the life of a 30 year loan.

           In essence, your $15k has cost you $80k in interest. This is cost vs. price.

As we usually break down and base our mortgage decisions on monthly payment, here is another visual for you.  This shows you what rising interest rates (on the left) do to the monthly payments as they fluctuate.

 RATE    $360k (loan)    $380k (loan)
6.00%    $2,158             $2,278
5.75%    $2,100             $2,218
5.50%    $2,044             $2,158
5.25%    $1,988             $2,098
5.00%    $1,932             $2,040
4.75%    $1,824             $1,926

I could go on about this topic, but frankly, the numbers speak for themselves.  As I said before, this is a relatively easy concept to grasp once you study it. It is a different way of thinking about selling and buying; going against the grain of our instant gratification mindset to thinking long term and looking big picture.

Attention Sellers: If you want a buyer, you need a COMPELLING sales price!

COMPELLING is the word of the year for sellers. No longer can a price be “good”, it must be compelling.

What does that mean ? 

Take a look at what is for sale around you. If you live in a subdivision, how many houses are currently on the market around you and how similar are they to yours? Are there foreclosures or short sales? Are there other sellers desperate to get out for a litany of reasons and they are selling at a compelling price?  This is not to say that you must price your home at the same price as a foreclosure, rather to say you have to be compelling against your competition.  Don’t ignore the fact that foreclosures, short sales and other compellingly price homes in your community are enticing to a buyer.  They do affect the value of your home and to discount that is the equivalent of putting your head in the sand.  

Why should I buy into this line of thinking?

Put yourself in the buyer’s shoes. You are looking at two houses in the same community; one is perfect and the other is a foreclosure. The foreclosure is 300 more sq. ft than the perfect home and priced 10 to 15k lower than the perfect home. Granted it needs work, but at that price it is a steal! What are you going to do?  If the perfect house was at a compelling price you would have to really think, right? There is roughly 13.1 months of inventory on the market in Greenville county today.  That should not make you panic as I would wager to say there are a certain % of homes that are not priced compellingly and will fall off the market.  Anyway you look at it, there is significant competition at all price points. There are homes selling and those are the sellers who have agents that understand the market and price them to sell.  A good agent is there to sell your house for as much as they reasonably can in any given market, not give it away. If they can’t explain to you and help you understand why a compelling price in necessary, you don’t have the right agent.

Does the market data support this opinion?

If you can’t back up your opinion with facts and data, it is a worthless argument.  Lucky for you, there is plenty of data.  All indicators say two things; there will be more buyers in the market and that selling prices will fall again due to foreclosures over the next year. Both Freddie Mac and Bank of America put out their forecasts for home prices. They forecast at least a 5% decline in sales prices for the next  year and half; price rebound Spring of 2012. Why? Because they know EXACTLY how many foreclosures are coming to maket. There exists a certain number of foreclosures that hit the market every month (no one knows that magical number is but we know it exists).  It is a controlled number so as not to depress the market further. You may or may not know that Bank Of America, Wells Fargo and a few other large lenders suspended the processing of foreclosures for almost a three month period.  In essence, that put the market three months behind in foreclosures. So add that backlog to the carefully calculated monthly number of foreclosures and we have a large number hitting the market at one time.

So is this a horrible time to sell? NO!!! If you selling to buy another house, especially a move up buyer, this is a great time. Why? Cost vs. Price….stay tuned for that next week. It will open your eyes to the opportunity!!!

When you understand the market, you will understand the opportunity.  - Lori

Welcome to The Educated Real Estate Advisor Blog!

Welcome friends to The Educated Real Estate Advisor blog! If you don't know me, allow me to introduce myself. My name is Lori Bayne and I am a Realtor with the Allen Tate Company in the great state of
South Carolina. I work and live in Greenville, SC and I LOVE my job. I sincerely enjoy educating my clients
and friends about everything real estate from finance to market data. We are living in strange times and the
real estate market can be very difficult to understand and navigate.  My aim with this blog is to deliver intelligent, relevant and insightful information regarding the real estate market. I firmly believe that when you understand the market, you will see the opportunity.

Thanks and I look forward to sharing with you soon!

Lori