Approaching real estate and mortgage lending with optimism.
If you are trying to make sense of the condition in the real estate and mortgage industries these days, don’t bother referring back to your old Economics 101 textbook where you first read about the laws of supply and demand. You’ll remember the side of the equation that says when the price of a product goes down, the demand for that product goes up.
Now, let’s apply our economics refresher course to the current housing and lending markets. According to The Wall Street Journal, the median U.S. home price was $201,000 in January of this year, down 4.6 percent from January 2007. The S&P/Case-Shiller National Home Price Index for the fourth quarter was down 8.9 percent from a year earlier, the biggest drop in 20 years. Furthermore, there was a 10-month supply of existing homes for sale in January, up from just under five months during boom times. The supply is up so prices are down.
In the credit markets, interest rates are relatively low. The 30-year fixed rate mortgage is at about 5.8 percent compared to over 8 percent in 2000. So not only are home prices at low levels, so is the price of the money needed to buy those homes, but demand has not been following suit.
The explanations why are as plentiful as the experts and regular folks offering opinions on the subject. Some say that people expect prices to drop further and are waiting to catch the bottom. Others point to apprehension about the economy in general or the state of the mortgage industry specifically. All of them have merit, but beg another question - should these macroeconomic analyses be the deciding factor for each individual?
“Two reasons that it’s not happening. One, the University of Michigan publishes the Consumer Sentiment Index. That exists. You can’t call that something that isn’t real. People are afraid,” explained Rick Ingersoll, a retired mortgage banker who divides his time between Traverse City Mich. and Hilton Head Island. “Number two is the fact that we are not even to the peak of the glut yet. We are going to have more foreclosures and a softer market than we’ve got now.”
The Consumer Sentiment Index (not to be confused with the Conference Board’s Consumer Confidence Index) assesses consumer confidence regarding personal finances, business conditions and purchasing power. It fell to its lowest level since 1992 in March, meaning that consumers are nervous about the economy and generally less willing to spend money. It is historically a pretty accurate economic predictor, so if you combine that with the already slow housing market and continued fallout from the mortgage industry situation it paints a rather bleak picture.
There’s no doubt that the troubled mortgage industry is a serious problem. The accelerating rate of foreclosures, especially on sub-prime and other adjustable rate mortgages (ARM), is causing liquidity problems throughout the banking and finance industry. The failures of Countrywide Financial, the nation’s largest mortgage lender, and investment bank, Bear Stearns, which went bankrupt due to its overexposure in sub-prime mortgage backed securities, are examples.
According to a recent Wall Street Journal article, the escalation in foreclosures may not be limited to sub-prime loans. The rapid rate of home value declines in some markets is causing more and more borrowers, sub-prime and higher quality, to owe more on their homes than they are worth. This is raising concerns that homeowners who can afford to continue making their mortgage payments may decide that it’s no longer worth it and will just walk away from their homes.
Is there any good news to go along with all of this bad news? The mortgage industry touched the stove and found it hot by getting too aggressive with risky loans. Now lenders are returning to more sensible lending practices and hopefully the industry will right itself over time. In fact, there is speculation that Bank of America is planning a total acquisition of Countrywide, having already invested $2 billion. We’ll have to wait and see how that plays out, but there will be more casualties elsewhere. In April, Capital One Financial closed its wholesale mortgage business and Lehman Brothers shut down its sub-prime lending unit to name two.
Of course, no discussion of an industry in crisis would be complete without noting that the government is also sticking its two cents in. Most notably in the form of the Federal Reserve’s backing of J.P. Morgan Chase & Co.’s buyout of the failed Bear Stearns at what amounts to pennies on the dollar. Consumer advocates argue that it is unfair to, in essence, bail out an investment company, at taxpayer expense, whose own practices not only brought on its demise, but also played a role in the entire industry’s troubles, while not offering any relief to consumers hurt by that company’s actions.
That argument has some merit if one believes that such intervention is a viable solution, however history shows that sound business practices and our old friends supply and demand are the best medicine.
There is evidence that the industry is taking an active role in finding a resolution. At the urging of U.S. Treasury Secretary Henry Paulson and former Housing and Urban Development (HUD) Secretary Alphonso Jackson, the mortgage industry created an alliance in October 2007 called Hope Now. Working in collaboration with credit and homeowners’ counselors and mortgage servicers, lenders are seeking out borrowers who may be at risk of getting in to financial trouble, possibly default, and reworking their mortgages in an attempt to stave off foreclosures. Through February, lenders have worked out over 1.1 million loans While this appears to be a good thing, there is reason for skepticism. Mark Nix, Executive Director of the Home Builders Association of South Carolina is one skeptic.
“If it was a bad loan in the first place, what reason is there to believe that it won’t default again?” he said.
Also, Congress already has its eye on intervening with the process. Specifically, there is a bill circulating that would have the Federal Housing Administration (FHA) guarantee the reworked mortgages, putting taxpayers on the hook for reworked loans that go bad again.
In the meantime what is a consumer to do - sit on the sidelines until things return to some degree of normalcy? Take this scenario: you’re ready to buy a home now and your financial house is in order, that is, your credit is good, you make a good income, your asset portfolio is strong and everything else that a lender wants to know comes up roses for you. On top of that, your real estate agent just showed you the home of your dreams and the price is right. Should you act now or wait? Hey, the price might go down even more and interest rates might fall further as well. If you’re thinking purely in terms of investment value, then maybe it’s worth the risk that somebody else will snap up that house, but weren’t we talking about your dream home?
If the news about the mortgage industry makes you nervous, think about it this way; in the 1980s when all those farmers were going bankrupt, did you stop buying food? Or, if you need to get to L.A. for a meeting you’re not going think about the awful mess the airlines have made of themselves (although they will remind you) and decide to take a train. You’re going to fly. Markets and industries go through ups and downs all the time and through it all, consumers buy goods and services based on their needs and wants.
Ric Spiehs, Vice President and Mortgage Sales Manager for Bank of America in Hilton Head and Bluffton says that the same sort of inward thinking should apply to buying a home. You should make your decision based on what you want, what you need and what is right for you. He also advises that borrowers be fully informed and prepared to take on a mortgage. That is, do the extra homework and be absolutely certain about the price, interest rate, closing costs, taxes, insurance, monthly payment -everything.
“It does seem that people are doing their due diligence a lot more before they purchase,” said Spiehs. I ’d say that if you’ve done that, and this is a loan that you qualify for and it’s a payment you can manage, I would look at the property in terms of what is it worth to you as a property to occupy, or what is it worth to you as an investment. Is it something you can manage going forward? If that’s the case, this is a good time to move forward because property values have settled to some degree and there are some excellent buys in our market.
“One thing that makes me a little bit nervous is sometimes people start to look at the properties they live in almost as stock investments,” Spiehs added. “They want to know the price of their house today, and then tomorrow, but there’s value to a property beyond what you can buy and sell it for. It has value as a place to live. A lot of people buy properties here to vacation in and then it becomes a retirement home. So, again, if the payment is something you can manage and you’ve done your due diligence on the property, I wouldn’t not buy because of what you see in the news. If the buyer is well prepared, then it really is an excellent time to buy “I would like to see us return more to a ‘what is the value of the property beyond what it can buy and sell for’ mentality. For the primary home-buyer, if you think you can wait a year to catch the bottom, let’s say you’re right. What have you sacrificed in that year to get here?”
The answer is similar for those who try to predict interest rates. If you can handle the payment and everything else about the deal is in order, lock it in now and don’t look back. If interest rates rise later, then you’ve won that game. If they come down, again, think beyond dollars about what you lose by waiting. Plus, you can refinance if it is to your benefit.
Speaking of refinancing, much of the same applies. It’s an individual question and there is no general blueprint that applies to everyone. There are all kinds of reasons to refinance. One is to lower your monthly payment. Another is to shorten or lengthen the term of your mortgage. Some people need to take equity out of their home to cover an expense. So, is now a good time to refinance? The answer today is the same as always; it depends on the individual situation.
For example, if you have a 30-year fixed rate mortgage at today’s interest rate, there’s obviously no point in refinancing to another 30-year fixed because you end up paying closing costs to get the same interest rate. However, let’s say you want to build an extension on your home and you have enough equity against which to borrow the necessary cash. Now you have a rationale to refinance even if there’s no interest rate benefit. On another hand, if you closed on your mortgage seven or eight years ago when 30-year fixed rates were in the upper 7 percent range, this is where staying on top of the news will do you some good because you’ll know that the current rate is about 5.8% and you would do well to refinance from an interest rate standpoint.
Sometimes other variables come into play as in a case with an adjustable-rate mortgage. Suppose you bought a home with the expectation that you would sell it within five years due to relocation. To take advantage of a lower interest rate, you got into a 5/1 ARM, that is, your interest rate is fixed for the first five years of the loan and then adjusts according to the market each year thereafter. As that fifth year approaches your plans change and you decide to stay put. Now you’re facing that interest rate adjustment. Yo u can remove the interest rate risk by refinancing to a fixed-rate loan.
These are simplified examples, but the point is that there is no broad stroke answer for everyone who asks the question; when is it a good time to refinance? It should still be noted, however, that an environment of low interest rates does make refinancing worth a look for a lot of people.
“There has been an increase in refinances, not only because of attractive rates, but also as a result of ARMs coming due,” said Ben Russ of Hilton Head Mortgage Corp. “Because of our current market conditions, people are holding onto their properties longer then they may have originally intended either to avoid selling at a lower price or at a loss. When the market was hot in 2004-2005, many people financed property with short term ARMs with the intention to sell before they start adjusting. Now they either have to refinance those loans or deal with the loan adjusting, which in most cases means an increase in rate and payment amount. Because the interest rates on fixed rate mortgages are still very attractive, many of these people are refinancing into fixed products for the rate and security that the fixed mortgages provide as they hold onto the property longer.” Rich Tiffany of Liberty Savings Bank agrees.
“Refinancing activity is absolutely higher with these interest rates,” he said. “People are moving from ARMs to fixed-rate loans to lock in a favorable rate and avoid rate resets, and people locked in at higher than current rates are refinancing to another fixed-rate mortgage to take advantage of lower rates.”
Another consideration is the climate in your local market. When you’re looking at the doom and gloom in the news, keep in mind that you are often being presented with very generalized national averages, or the focus is on the more distressed markets.
“I do think that the media tends to over-report the negative side of the housing market and mortgage industry situations,” said Alan Perry of Coastal States Bank. “People see the bad news and get the idea that nobody’s going to lend money, so they stay away and never even get to the point of finding out what they qualify for.”
Perry emphasizes that this is just not true. Lenders are as willing as ever to write loans to qualified borrowers. “We’re consultants,” he said. “They need to come in and speak to us about their specific situation.”
With rising foreclosure rates making a lot of headlines, Joanne Sherwood of SunTrust Mortgage points out that the majority of recent foreclosure activity has taken place in a handful of markets with Nevada, California, Arizona and Florida topping the list.
“That’s due to a lot of speculation in those markets,” she said, referring to the large numbers of investors who bought real estate with risky ARMs intending to “flip” those properties in the short term. “South Carolina ranks in the 40s out of the fifty states in foreclosure rates. Although a lot of people around here do buy real estate as an investment, they tend to take a more long-term approach.”
A bigger problem facing our area is that such a large number of people who want to buy property and move here come from troubled markets such as Michigan and Ohio. “They can’t sell their home up north, which they have to do before they can buy here,” said Sherwood.
Even so, Tiffany sees some light at the end of the tunnel. “A lot of folks have planned for a long time to retire to the Lowcountry because this is such a great place to be. I’m seeing more of them willing to take less than they had hoped for their home up north because they are ready to be here now,” he said.
So what’s the bottom line? Is there one? How about a little dose of common sense? “Rates are very attractive for people who qualify and it’s a buyer’s (housing) market,” said Robert Trask, President and CEO of Atlantic Community Bank. “Understand your personal financial situation. Make sure everything is accurately documented and reported and talk to your real estate agent and your lender. They are your allies. I think the quality and the quantity of (real estate and finance) talent in this market is phenomenal.”
Add to that the fact that the Lowcountry is a very desirable place to be as is usually the case with coastal communities. “Just look out the window,” said Trask, “the Atlantic Ocean isn’t going anywhere.”
The point being is that people want to be here and that is a key ingredient for the future economic growth of a community. Markets fluctuate, so why not make your move now while prices are low and interest rates are favorable?
Q: I hear that the subprime loans were all ARM loans and that is what has caused the turmoil in the financial markets and they should be avoided.
A: While it is true that most subprime loans were ARMs, it is not true that all ARMs originated over the past few years were subprime. The recent turmoil in the financial markets is the result of a number of factors (historically low interest rates, excessive real estate speculation, loose underwriting guidelines and outright fraud, to name just a few) converging at the same point in time - a comprehensive explanation is beyond the scope of this column. However, ARMs can be an attractive way to finance/refinance a home. In “normal” markets, the rate of interest on an ARM can be significantly lower that the rate on a comparable fixed-rate loan, resulting in a substantial savings to the borrower. As mentioned in the answer to the first question above, a number of factors will determine whether or not an ARM is right for you. Some of these factors include: (a) the difference between the interest rate on the ARM and the rate on the fixed-rate loan, (b) how long you intend to own the property, and (c) whether or not you can “afford” the maximum rate that can be charged on the life of the loan (aka the “ceiling” rate). The loan program you choose should fit into your overall financial plan. As always, discuss these and other financing options with your mortgage professional.
Call Joan Sherwood at (843) 341-0036
Q: What is APR?
A: The Real Estate Settlement Procedures Act requires that all lenders disclose to the borrower an Annual Percentage Rate or APR on all real estate loans. It is very important to note that the APR does not affect your monthly payments nor does it affect the note rate of your mortgage. The APR is simply a calculation that factors in closing expenses and attempts to give borrowers a method of comparing loans with different rates and fees. If you notice an APR that is significantly higher than the note rate on the mortgage, take the time to review your good faith estimate to make sure the fees listed match what you were quoted. The APR is an important point of comparison, as long as the loans are of similar terms. APR is not helpful when comparing a fixed rate loan versus an Adjustable Rate Mortgage or when comparing loans of different durations. Also, please recognize that the APR makes a significant assumption; that the loan will be held to maturity. If a loan is paid off early, the closing expenses will have a greater impact than if they were spread over a longer time period. Call your local Bank of America branch today.
Q: How can I be sure my mortgage banker is leading me down the right path when it comes to refinancing?
A: While it may be tempting, shopping rates in today’s market may not be the best approach to meeting your long-term needs as a borrower. It is more important to choose a mortgage banker wisely, finding one you can trust to look out for your best interests through the years. For safety and reliability, insist on an FDIC insured bank. Look for a mortgage specialist there who establishes long-term relationships with his or her clients: someone who would only advise you to refinance if you can truly benefit from it. Your lender should have years of experience creating mortgage packages, be able to advise you on a variety of products, and give you the flexibility, individual attention and customized solutions that will help you now and for years to come. Call BankMeridian today at (843) 842-9444 and ask for mortgage specialist Fran McKinney. Visit us online at bank-meridian.com to learn more.
Q: I want to use the equity in my home to make various home improvements over the next year. Is it better to get a Home Equity Line of Credit or a Home Equity Installment Loan?
A: A Home Equity Line of Credit (HELOC) is your best option. Since most home improvement projects require the payment of expenses at different times, a HELOC provides that flexibility. It is a variable rate loan that is generally tied to the prime rate. For the term of the line (5 or 10 years), you can draw what you need up to your credit limit and only have to pay interest only payments. A Home Equity Line of Credit is a great option because it provides you the ability to access the equity in your home whenever you need it. You only have to apply once and then can use the line over and over for all of your borrowing needs.
Please contact a representative at the nearest Liberty Bank financial center for all of your financial needs.
Q: I have an Adjustable Rate Mortgage – and I also have a hard time sleeping at night with the current unrest in the credit markets. Should I refinance?
A: Your very first move is to pull your current loan documents and take a look at a few key areas. What you learn may surprise you, along with the possible conclusion that just because your ARM is going to adjust it’s not necessarily a bad thing.
First, find your interest rate adjustment date. Second, find the index on your note. Interest rates on ARMs are adjusted based on the movement of certain key indexes, such as the one-year Treasury index or six-month or one year LIBOR index. All index rates don’t move in lockstep, so it’s important you know which one your note follows. Visit coastalstatesbank.com.
Q: With the tightening of the mortage industry, can I still easily get a loan?
A: Because of the general tightening of the mortgage industry in the last year, there is a perception that loans are impossible to get. That is incorrect! People who pay their bills on time still qualify for excellent mortgages. People who cannot prove their income can still get a loan! Maybe they will need a 700 credit score instead of a 620 score and maybe a little more of a down payment is needed, but loans are very available. We make local loan decisions and still provide Jumbo financing, Stated Income loans, 90% investment property fian-ancing and 100% financing with no mortgage insurance. Money is available for qualified borrowers. Call Hilton Head Mortgage at (843) 842-2800.
Q: Do loans with “no closing costs” actually exist?
A: It is rare to find a loan with no closing costs. A few Equityline lenders will pay closing costs as business enticements. Closing costs are incurred as governmental regulations require appraisals, credit reports, attorney’s opinions, title insurance, etc. To supply these services charges are incurred. It is wise to obtain services from professionals in whom you have confidence. You should know all refinancing costs before you become obligated. Call Novit and Scarminach at 785-5850.