Happy Thanksgiving!!!

Have a wonderful holiday.

Conforming Loan Limits Will Remain the Same

It looks like the Office of Federal Housing Enterprise Oversight will not reduce the current $417,000 conforming loan limit for a single family home in 2007. They may raise it if necessary, or let it stand for 2007. If prices drop they will average that against the 2007 levels when deciding the 2008 conforming loan limit.

That's good news for housing from the financing perspective, as it will hopefully keep housing at a more affordable level with favorable interest rates for mortgages.

Gifted Down Payments

So Mom & Dad are finally coming through and giving you the down payment for a brand new New York City apartment. That's great! There's a couple of things to be aware of when applying for a mortgage with a gifted down payment.

In a perfect world, you would receive the gift funds at least 3 months before you plan to purchase the apartment. Underwriting rules for full documentation mortgages require that a borrower show 2 months (occasionally 3 months) of your most recent bank statements showing enough liquid cash for the down payment and the closing costs with no large deposits. A large deposit is defined as any unusual deposit greater than 2% of the purchase price of your apartment. So if mom and dad kick down the cash after you've signed the contract of sale, you may not qualify for a full documentation mortgage since there will definitely be a large deposit in your bank account.

This would also be the easiest way to get around the asset requirements required by the Board of Directors in a cooperative purchase.

If they just can't part with the money until they are sure you aren't going to spend it recklessly at Barney's and the Darkroom, then you'll have to be prepared to document the down payment as gift funds.

This is done by having the donor (mom and dad in this case) sign a statement that they are giving you the money and will not require it's repayment. Additionally they will have to show 2 months of the bank statements of the account that they emptying to give you the funds to prove their ability to give the money without you having to pay it back. I find that parents rarely want to comply with this last step.

So the best move is to either have an extremely high credit score to override the showing of assets or prove to mom and dad that you can handle having the money in your bank account for a few minutes without running to the Nike store.

There is another sneakier way too. Simply put your name on mom and dad's nest egg account that holds that precious down payment money making it a joint account in your name as well as theirs.

Existing Home Sales Ease

Also according to the National Assocation of Realtors:

Existing-home sales eased in September, as did the number of homes available for sale – indicating the housing market is stabilizing. Total existing-home sales dipped 1.9 percent to a seasonally adjusted annual rate of 6.18 million units in September. This pace was 14.2 percent down from a year earlier. David Lereah, NAR’s chief economist, said: “Considering that existing-home sales are based on closed transactions, this is a lagging indicator and the worst is behind us as far as a market correction – this is likely the trough for sales.”

Pending Home Sales Level Off

According to the National Assocation of Realtors:

Home sales are expected to hold fairly steady in the months ahead, according to the latest reading on pending home sales. The Pending Home Sales Index, based on contracts signed in September, slipped 1.1 percent to a level of 109.1, following a 4.7 percent gain in August. The September index was 13.6 percent down from a year earlier. David Lereah, NAR’s chief economist, said the index shows home sales will not be moving much in one direction or another.

Say What? Conforming Loan Limit May Decrease?

I saw this short article about the conforming loan limit (the maximum loan amount that Fannie and Freddie will purchase) may drop as the average price of homes nationally is dropping.
That decision will be up to the Office of Federal Housing Enterprise Oversight. But if the latest figures regarding home prices from the Federal Housing Finance Board are any indication, the ceiling on loans that can be purchased by Fannie Mae and Freddie Mac could slip next year, perhaps substantially.
The limit is based on the percentage change in the average price of both new and existing homes sold from one October to the next as measured by the FHFB, so the final word on the maximum for '07 is still a month away.
But according to the FHFB's latest survey, which was released last week, the average price of houses fell 2.9% in September, from $306,100 to $297,200. If that percentage decline is applied to the full year, the GSE loan limit would fall to $404,907.
But with home sales continuing to slow and the inventory of unsold homes continuing to build, the decline, if indeed OFHEO decides a lower limit is in order, could be even more drastic.
Over the last 12 months, the average price of houses has been lower than September's figure only once. That was in January, a traditionally slow month in the housing market, when the average was $295,700.
As recently as June, the housing finance board reported the average price as $317,900.

Bubble Schmubble

CNN Money came out with an article that says that New York City is one of the country's top five bubble proof markets. Limited availability and the fact that the city's financial sector can't stop making tons of money seems to be big factors in their assessment.

See the details from cnnmoney.com.

Top 5 Housing Bubble Proof Markets:
1. San Francisco - If developers were allowed to go all out with building on San Francisco’s Treasure Island, Presidio and the Marin Headlands across the Golden Gate Bridge, the price of housing would fall close to the cost of construction. But those pristine natural amenities are the product of one of the most anti-development political cultures in the country - and a perennial magnet for the highest earners.
2. Los Angeles - Along with San Francisco, Los Angeles was the first major metro in the United States to become “filled up” during the 1960s and 1970s because of geographic constraints and political restrictions on building. Three-quarters of new construction is now in-fill development, and much of it is high end. The gentrification is pricing out middle and lower income families, who are moving in-land.
3. Seattle - The newest graduate to join this elite class of super-expensive cities, Seattle is the least likely to hold its place. New zoning laws approved by the city council this year lift restrictions on building heights in the downtown core, and promise to generate $100 million worth of affordable housing.
4. Boston - Boston had the strongest wage growth of these cities through the tech bust and jobless recovery. Over the next five years, it will have the highest per capita income, next to San Francisco.
5. New York City - The force with which middle class households here are getting replaced by wealthier ones was reflected in the recent hysteria over the Tishman Speyer group’s $5.4-billion acquisition of 110 apartment buildings in lower Manhattan, the largest real estate deal in recent history. The apartment blocks are home to thousands of rent-controlled tenants who should have been priced out of the city years ago - and fear they now will be by market rents under the new owner.

NY Mortgage Brokers to Be Registered

A story appeared in the NY Times about a new law requiring individual Loan Officers to be registered with the New York State Banking Department. This is an excellent idea. There will be minimum educational requirements so that we can at least hope to have a base level of expertise in our industry.

The angle of the story is that those who perpetuate fraud won't be able to move to another state to continue defrauding consumers. That may or may not be true, I can't say. But I think that the vast majority of mortgages originated here in New York City are on the up and up.

I like the law because it will serve to create expertise in mortgage lending. Right now if you can fog a mirror and are over the age of 18, you can be a Loan Officer. My competition is anyone who fell into the position, or saw some easy money a few years ago. Mortgage originating is a complicated business that in which there are many variables that need to be juggled effectively in order to close a loan properly and professionally. It's not simply selling, nor is it entirely knowing lending guidelines or understanding the housing types and the economy in general. It's a combination of so many different abilities, that a license might help keep those out of the business who aren't willing to put in the time to learn what it takes.

This is a business that requires specialization and constant updating of one's skillset to be proficient. I think it's time that it was recognized as such.

"Toxic" Mortgages -- The Next Refi Boom

It's everywhere. The magazines are running cover stories, the news is full of reports, the powers that be are holding hearings. Consumers are shaking in their boots. They will want to refi before their monthly adjustable ARM eats their house like on the cover of Business Week.

Now the mortgage originators are ready to refi these mortgages into fixed rate mortgages. The borrowers will be safe..or will they?

What were the motivators for accepting the payment option ARM in the first place? Some may have been seduced into it by their Loan Officer (yeah I said it). Some may have tried to buy more than they could afford with a fixed rate mortgage. Some borrowers may have thought that we weren't going to live in the property this long- that it was a prime flip. Some may have been thinking about freeing up capital to put into another investment.

It's not a no-brainer to immediately think that this is the next refi market. It's necessary to know what the initial motivation was when the borrowers purchased the property. I didn't originate many of these mortgages, maybe 2 or 3 out of a few hundred mortgages in the last few years, so I can't just immediately assume that these are all refi fodder. Also do these borrowers now owe more against their home than they initially borrowed? What is the prepayment penalty? One reason why I stayed away from these pay option ARMs was the steep prepayment penalty would have prevented the borrower from refinancing their mortgage down the road should rates drop. That would have prevented my doing another loan with them, bad for business in my opinion.

These borrowers are going to be hard to refinance. They may not qualify for a fixed rate mortgage that will increase their payments, most pay the minimum payment option resulting in negative amortization. The higher payment even if only interest only is going to be much more than they are used to paying each month. I think that we as Mortgage Brokers need to spend a little extra time, work with the borrowers to find the best solution and provide more education about what a mortgage entails and the responsibilities inherent in borrowing mortgage money.

Trending Toward Fiduciary Duty To Borrowers

The trend among regulators in states such as New York, New Jersey, Ohio, and others is to make the mortgage broker, in essence, have a fiduciary duty to the borrower, according to E. Robert Levy, executive director of the New Jersey Association of Mortgage Brokers. Speaking at the group's annual convention in Atlantic City, Mr. Levy said the burden would therefore rest with the mortgage broker to select the loan product for the consumer. As a result, the mortgage broker could be held liable for making the wrong choice. He said consumer advocates are in favor of this position. Mr. Levy, who is also chairman of the advisory council of the American Association of Residential Mortgage Regulators, said it became clear in a meeting of that council that regulators were enamored with the "suitability test." However, Mr. Levy reminded the audience of New Jersey's experience with the original version of its predatory lending law, which contained a "net tangible benefits" test. That test closed the secondary market for loans in the state, and was eventually removed from the law.

Of course, this type of relationship should exist in some form. For the Mortgage Broker it only makes sense in order gain referral business. Certainly with Mortgage Brokers working within a community, such as New York City, it makes sense to fit the borrower to the mortgage if you want to keep working in the field. Perhaps some of the national lenders who rely on TV commercials to generate business will be opposed to actually knowing who their borrowers are.

The IRS Is Going High Tech.....Finally

The Internal Revenue Service plans to return transcripts summarizing mortgage applicants' income and tax data to lenders in an electronic format within two business days, starting on Oct. 2. As a result of the change, mortgage lenders should no longer cite the slow, paper-driven process of faxing 4506-T requests to the IRS as a reason for not verifying the income of borrowers who intend to take out "stated income" and other mortgages requiring limited documentation. "This is going to be light-years ahead of where the IRS was before," says Mike Summers, vice president of Veri-tax.com, a third-party vendor in Tustin, Calif. The move by the IRS also could have a big impact on curbing mortgage fraud, considering that many problem loans have falsified income tax filings; however, it will also mean that lenders will have to pay $4.50 for each tax year covered in a 4506-T request, whereas the service was free in the past.

It's about time that there was an efficient way to verify tax returns. And it may even generate revenue which is their middle name.

"Exotic" Mortgages Are Still Being Discussed

'Exotic' Guidance Imminent Federal banking regulators are expected to issue their long-awaited non-traditional mortgage guidance in the next few days, possibly as soon as Friday, according to industry officials. The long-awaited guidance addresses underwriting and disclosure standards on interest-only mortgages, payment-option adjustable-rate mortgages, and "piggyback" loans. Regulators are concerned that some consumers do not fully understand how these products reset and could face steep monthly payment increases. Meanwhile, Friedman Billings Ramsey analyst Paul Miller issued a report saying the impact of the final guidance will be "relatively benign," especially in regard to option ARM lenders. "We believe, though, that the new restrictive guidance could shrink the option ARM market by prohibiting the more marginal underwriting practices," he writes in a Sept. 27 research paper.

The underwriting guidelines for Option ARMs have changed dramatically in the past months, mainly due to the secondary market's trepidation on buying the notes. My clients do not read the disclosures I send them already, and when I force them, their eyes glaze over. Instead of creating more disclosures, can we re-vamp the ones we have to make them better serve their original purpose?

What is the Fed Thinking?

Who knows. But the Federal Reserve Bank of Cleveland has some charts that show what the expectations of the market are based on the Chicago Board of Trade's Options Market. Apparently we think that the Fed Rate will stay at the current 5.25% in December, and a few think that the rate will be cut to 5%.

Pimco's Bill Gross thinks that the Fed will cut rates in 2007 as the economy cools off. He doesn't say when next year though. Just next year. He goes on to say that the old trick of slashing rates may not do the job as it has in the past. This may be the first time since banking deregulation in the 1980s that housing is the drag on the economy. The Fed may have to come up some new ideas to get us up and running. That's what he says.

If the Fed starts cutting rates, this may help the borrowers who need to refinance ARMs as they mature into fully indexed adjustable mortgages. Refinance activity will increase somewhat. I don't know if purchase activity will increase as a result since there are too many other factors such as sellers who still want (or need) top dollar, currency fluctuations that may not go our way, and the fact that a weakening economy generally doesn't put much money in the consumer's pocket.

What? No Donuts?

You know times are tough when Countrywide cuts the free donuts on the last Friday of the month to their employees. The largest mortgage originator in the country is not only letting go of up to 10% of their general and administrative workforce, but they are comtemplating the unthinkable...no free donuts once a month. I'm sure that will add enough to the bottom line to get through this rocky earnings season.

Real Estate Workers Singing The Blues

After a five-year boom of unprecedented proportions sent workers flocking to the housing professions, the industry slowdown is seeing more and more mortgage lenders and property agents dropping out of the business--of their accord as well as via corporate payroll cuts. The Bureau of Labor Statistics reports that realty and mortgage jobs topped out at 504,800 in February, falling to 503,100 by June. Chicago-based consultant Challenger, Gray & Christmas, meanwhile, calculates that layoff announcements in the real estate industry hit 3,033 in the first eight months of the year--up a staggering 96 percent from the corresponding period in 2005. Mortgage companies announced 8,513 layoffs over the same time frame, up 70 percent year-over-year. "There will be some decline in employment," concedes Mortgage Bankers Association senior economist Mike Fratantoni, "but it is not going to be the 18-percent decline we're seeing in originations."

Check out the story on Reuters

Realtor Prez: "Do as I say, not as I do"

So the president of the National Association of Realtors has been trying to sell his house for a year. He didn't listen to his brokers, who have been telling him to lower the price, so it's been sitting on the market with little interest. Apparently this gap between buyers and sellers in today real estate market goes straight to the top. One interesting quote in the Washington Post article is when he says that he didn't listen to his brokers when originally pricing the property.

I hope he listens to his brokers when he's doing his job as President of the NAR...

Ex-HUD Chief Wins NY AG Primary

Despite Mark Green's efforts, former Department of Housing and Urban Development Secretary Andrew Cuomo revived his political career Tuesday with a victory in the New York State Democratic primary for attorney general. According to the New York Times, with 98% of the vote counted, Mr. Cuomo led his nearest challenger, former New York City Public Advocate Mark Green (the brother of real estate developer Stephen Green), by a margin of 53% to 33%. The current attorney general, Eliot Spitzer, is running for governor. In 2002, Mr. Cuomo ran for governor but dropped out in the midst of the primary campaign. His name still appeared on the statewide general election ballot as the candidate of the Liberal Party, although he did not actively campaign.

Night Terrors and the Suitability of Mortgage Lending Products

Yes, there have been many different mortgage products that have come to the market in the last few years; this has much to do with creating affordability, and a newly mature secondary market for mortgage debt. The whole secondary mortgage market is only 20 years old, so when the Fannie and Freddie were the only game in town the products were much more limited due to the lack of funding.

As I see it, there are 2 types of mortgages: Adjustable Rate Mortgages and Fixed Rate Mortgages. Within those 2 categories there are a variety of characteristics that may be combined to tailor a mortgage to the borrower’s needs.

With adjustable rate mortgages there are characteristics such as: index, payment amount (interest only or fully amortizing), length of the loan, length of a fixed rate period, rate caps during the adjustable period.

With fixed rate mortgages there are characteristics such as: payment amount (interest only or fully amortizing), length of the interest only period (if any), length of the loan, and negative amortization.

These characteristics are combined in a manner that creates a mortgage suitable to the needs of the borrower and their plans for the real estate purchase.

A suitable candidate for something like a payment option adjustable rate mortgage with the possibility of negative amortization is someone whose income is largely from bonuses and who has significant knowledge of financial markets and the indices that are involved. So a Wall Streeter who makes $1,000,000 per year with $800,000 of it coming from his yearly bonus, who can show a 3 year track record of this bonus might make an excellent candidate for a payment option ARM with the potential for negative amortization. He knows the index, such as the 12 month treasury average is a lagging indicator, he knows that during the course of the year he can pay an interest only payment (creating no negative amortization, but servicing the debt only) or even elect to pay a minimum payment creating adding part of the interest that is due to the loan amount if he would rather do something else with his money on a month to month basis. When his bonus comes he can make a significant principal payment on the mortgage. This type of borrower may view his home as another of his many investment vehicles in his portfolio. In New York, the negative amortization limit is 110% of the original loan balance. This is much lower than the national 125% of the original loan balance limit for negative amortization.

I personally haven’t originated many of these negative amortization mortgages. I’ve originated a few in my career; one was on a $3,500,000 single family home purchase by an Art Dealer who makes around $1,000,000 per year. He put down $2,100,000 on the house and took an option ARM for the remaining $1,400,000 needed to make the purchase. In this case, his income, while large on a yearly basis, comes from the sale of multi-million dollar works of art. He may be better able to carry the payment if he can from time to time pay a minimum payment in order to keep his house payments up to date. He owns the majority of his home; he is savvy enough to know that he is going to add to the balance of his mortgage if he pays less than the interest only payment due. He also makes an income to support large principal payments during the course of the year should he choose to pay off his house further.

A suitable candidate for an interest only adjustable rate mortgage with a fixed period of 3, 5, 7 or 10 years without the possibility of negative amortization is someone like the case scenarios above as well as some others. One candidate might be someone whose plans are to stay in the property less than the fixed period. I have one person now who is going to stay in the property for 5 years. He is going to get married within the next year, his wife and he will live in the condo (new construction in Manhattan) for a couple of years until they have children at which time they are planning to move into a larger home. His fiancé currently owns a Manhattan studio apartment; he is buying a 1 bedroom condo with a home office. When they are ready to move, they will have the proceeds from the sale of her apartment as well as the proceeds from the sale of the 1 bedroom condo in order to purchase the larger apartment. Both are on excellent career paths, so their income is also expected to increase. If you look at an amortization table for a $580,000 mortgage, you will see that for the first several years, the principal payment is fairly low for the first several years. Also since they are not planning to stay in the property for the rest of their lives, which is typical with Americans in general, they would rather take the money that they save in their monthly payments elsewhere to gain value. Another candidate for an interest only mortgage is someone like my mother, who at 62 years of age wanted to sell her larger 2 story and move into a ranch style townhouse. She is downsizing her home and the amount of maintenance that she needs to do (finally). She decided on an interest only mortgage because, at her age, she feels that she isn’t interested in paying off the home. She is unsure of what she will do when she retires (as if that is going to happen – it’s like pulling teeth to get her to take a day off), or whether she may prefer to move closer to me when my wife and I start having children. What she does know is that it’s unlikely she is going to stay in this house for 30 years at her age. So why should she pay more in monthly payments for a fixed rate amortizing mortgage now?

A suitable candidate for a fixed rate interest only mortgage is all of the above and those who are going to stay in their home for more than 7 years. At that point, they may as well finance they homes with a fixed rate mortgage paying interest only payments for the first 10 or 15 years of the loan. The payment isn’t much more than a 10/1 Interest Only most of the time, lately it’s the same if not lower. One nice feature of the fixed rate interest only mortgage over the fixed rate fully amortizing mortgage is the payment recast feature. I have a borrower right now who is moving up in housing. He’s buying a $1,200,000 coop on the Upper East Side; moving from a $790,000 condo on the Upper West Side that he purchase less than 5 years ago. Right now he has to carry both properties until he sells the UWS condo due to timing and the nature of coop approval. So he’s putting down $300,000 on the purchase of the coop which is the 25% minimum down payment required by the coop board. When he sells the condo, he will realize about $400,000, which he will pay toward the principal of the $900,000 mortgage on the new coop. This will immediately reduce his monthly payment because the payment will be re-calculated based on the new principal balance. Furthermore, this borrower plans on paying off his mortgage entirely within 10 years, so as he makes these larges principal payments, his monthly payment will be further reduced. Thus it was more appropriate for him to finance his coop purchase with an 30 year fixed rate interest only mortgage than a 30 year fully amortizing fixed rate mortgage because the fully amortizing mortgage’s payment would remain the same until the entire balance is paid. It’s nice to see the immediate benefit of principal payments and I think it’s an inducement to make extra principal payments if the borrower can immediately see the effects of prepaying his mortgage.

A candidate for the fixed rate fully amortizing mortgage is, of course, all of the above and those who are going to stay in their homes for more than 10 years. Particularly the couple in the interest only example when they buy the house where they want to raise their children. Then, most likely, they will want to stay in the house at least until their children are in college, so that will be close to 20 years. Then it certainly makes sense for them to finance the purchase with an amortizing fixed rate mortgage. Another suitable candidate is someone who has owned the home for several years who is looking to reduce the term of the mortgage and pay it off quicker now that their income is higher. Someone going from any of the above mortgages to a 10 or 15 year fixed rate mortgage.

The length and terms of the financing should be appropriate to the plans of the person who is buying the home. Here in New York, I’m sure there is some concern that static income individuals, or individuals with less than perfect credit are trying to squeeze into homes they can barely afford. And buying these homes with no down payments. I know the press has been about people who bought homes and are now in danger of losing the home due to the inability to pay the payments they promised to pay. On what level is the homeowner responsible? On what level is the mortgage originator? The lender? The secondary mortgage market? All tricky questions that we must navigate. There are several different factors at work here. One is the availability of mortgage products, one is the highest level of homeownership ever, one is the rapid increase in home prices over the last few years and another is the ability to purchase a home with a lower down payment than ever before.

The most important thing that we can do is to educate people on the process, the financing and the responsibilities of homeownership. I’m a big believer that knowledge is the key. Also when I read many of these horror stories, I can’t help but wonder why they didn’t read any of the disclosures, why they didn’t ask questions?

Charge that Down Payment

Buying into a condo that requires a down payment and don't want to put any money down? According to the Real Deal, American Express has got your back. The credit card company has teamed up with the Moinian Group to allow buyers to charge their down payment to their American Express. Of course it's due in 30 days, but you can buy now and pay later.
American Express says that it's a benefit to it's members, that they can accrue precious points to qualify them for round trip tickets to Paris or some remote island. Moinian Group is trying to sell condos. It's win-win right?
When it comes to articles about mortgages these days it's all about how borrower's are taking out riskier and riskier loans to finance their homes. That these risky loans are going to cause mass hysteria and foreclosures across the land. There's no way out.
Or is there? How about charging your down payment to a high interest credit card? Yeah...that's the ticket.
My take, why not let the buyer obtain 100% financing. It's obviously safer than letting them charge their down payment to a credit card. Our debt load is huge, no question. Americans love to charge their purchases. Is it because we get miles? Or are the credit card companies offering these incentives because they want those precious credit card balances at 24% interest?
Here in New York we can charge our rent. Why not charge our down payments too?

Give Us All the Information

Mortgages are fairly complicated financial instruments, and deserve a loan officer's undivided attention when structuring the deal for any prospective borrower.

Unfortunately, we get prospects who come to us saying something along the lines of: "I was a quoted 6.5%. Can you do better?" What program? Can you qualify for the mortgage showing full income and assets? What's the loan amount? Purchase or refinance? What is the loan to value? How much are you putting down? Is this an interest only? Fixed Rate or adjustable? What is your credit profile? Any judgment lurking on your credit report? What is you middle credit score?

We ask these questions because we have to ask these questions. I cannot know if a rate is a good one or not until the particulars are divulged. For some 6.5% might be a fantastic deal, for others the worst deal out there. Each mortgage is specific to the inidividual borrower.

This is why it's most important to develop a level of trust with your loan officer, and work with a loan officer who educates you as a consumer along the way, so that your understanding of your financial picture becomes more broad as you progress through the transaction. Ask questions, and answer questions.

Begin the dialogue, the loan officer is on your team.