Michigan Loan Experts

Is now a good time to buy?

For Americans wanting to buy a new home, there are always two time frames to consider:

1. Now
2. Later

It's why prospective home buyers love to ask the question: "Is now a good time to buy?"  If now is not a good time, they reason, certainly later must be.

Strangely, though, "Is now a good time to buy?" is a question that people ask their real estate agent but never their mortgage guy. 

It's probably a good thing, too, because loan officers have seen a lot of changes over the last few months and we're expecting a lot more this year.

But it's okay.  You can ask me now: "Is now a good time to buy?"

                   

And I answer: "Absolutely and unequivocally yes."

Now is a good time to buy -- not because home prices are flat or because sellers are willing to make deals, but because none of us mortgage guys can predict what the mortgage market will look like "later".

"Now" is full of knowns.  "Later" is full of unknowns.

It's not good to try and buy a home "later" only to find that tighter standards mean you can't get financing any longer.

How much is your home really worth?

The number of home valuation Web sites continues to grow. 

For home sellers, these programs can give a false sense of security (or insecurity!) about at what price a home should be listed for sale.

Computer programs can never replace the role of licensed home appraisers and that's because valuing a home is not as simple as providing some inputs (traits) in order to get some output (value). There is a "fuzzy logic" that computer programs just can't produce in the same way that appraisers and real estate agents can.

Even with tax records, recent sales data, and a full description of a property, valuing a home is as much "art" as "science". 

There are "human" considerations that include neighborhood quality and curb appeal that a computer can't measure.  Nor can a program take into account how a kitchen may require $20,000 worth of work to bring it "up-to-date" or inline with neighbors' homes.

Besides, the real value of a home is what somebody is willing to pay for it.  Therefore, you can never truly know what a home is worth until it has sold.

So, while automated valuation tools are a good start to finding a home's value, they're not equipped to finish the job. 

FHA Downpayment Assistance Ban Effective Soon

After lengthly review the Federal Housing Administration is pulling the plug on 'charity gifts' to help homebuyers utilizing FHA mortgages.  The ban goes into effect on November 7, pending a possible court injunction being pursued by the affected charities.
 

Charity downpayment assistance programs (DPA) are very popular in FHA mortgage circles as a way to help buyers circumvent the FHA downpayment requirements.  The FHA currently requires a downpayment of 3% on home purchases from the buyers.  The catch is that the 3% funds can be a gift from a family member or non-profit.

Downpayment assistance programs legally organize themselves as non-profits so they can 'gift' the funds to the buyer.

Here's an example of how they work:

• Buyer makes an offer for a home listed at $100,000 telling the seller he wants to use a charity program.
• The Charity agrees to give the 'gift' to the buyer IF the seller 'makes a donation' to the charity equal to the gift being given plus $500.
• Seller says OK, but only if the buyer pays $103,500 for the home instead of $100,000
• Closing takes place with $3,500 being taken from the sellers proceeds and 'donated' to the charity.  The buyer gets a 'gift' of $3,000 from the charity to satisfy the FHA downpayment requirement.  The extra $500 is kept by the charity for itself.

The main reason cited for the ban is that downpayment assistance programs push home sale prices three percent higher than they otherwise should be.  The extra three percent is not "home value" -- it's "help" and is repaid over time in the form of a higher loan amount.  There really is no gift, it's money the buyer ultimately borrows and gets back in a quid pro quo arrangement

One study cited by FHA and used to pass the ruling said that home buyers participating in downpayment assistance programs go delinquent with two times the frequency of home buyers that don't.

FHA's other big problem with these so-called charities is that many really operate as a for-profit venture and really exist as charities solely to circumvent the FHA rules.

Fixed Rates Are a No Brainer These Days

In another sign that mortgage markets are a bit unpredictable lately, mortgage rates are virtually identical for conforming fixed rate mortgages and conforming adjustable rate mortgages.

This is an extremely uncommon market condition; usually, adjustable rate mortgages carry lower rates over their initial fixed rate period (i.e. 3 years, 5 years, 7 years) than corresponding 30-year fixed rate loans.  Those lower initial rates are the only reason an adjustable rate MIGHT make financial sense vs. a fixed rate loan for some people.

Mortgage pricing varies on a case-by-case basis, but there is little incentive for a mortgage applicant to choose an adjustable rate mortgage today over a fixed rate mortgage. 

A "teaser rate" really is 'teasing' anyone all that much if it's nearly identical compared to the fixed rate offerings.

Where Did The Money Go?

In a study of 2,036 U.S. adults commissioned by Visa USA, nearly half of all Americans are losing track of their money. 

An average of $45 in cash is "lost" each week in what Visa dubs "mystery spending", Visa's version of "I know I had this money in my wallet but I can't figure out what I spent it on."

Averaged out over the course of a year, mystery spending accounts for $2,340 -- enough to fund a Roth IRA or other investment plan.

According to the study, events most likely to cause "mystery spending" include:

• Out for a night on the town (58 percent)
• Grocery shopping (55 percent)
• Out with children (50 percent)
• Shopping during a sale (40 percent)
• Shopping with friends (33 percent)

How people spend money isn't the point of the survey but it does raise an interesting point about how careless we can all be with our dollars. 

On one hand, we wonder how will we fund retirement, or pay for college, or send our children to tennis lessons.  On the other hand, we aren't even aware of how much cash we're spending and where we are spending it.

For example, if the average American saves the $2,340 annually at 8% instead of "mystery spending" it, that money could grow to $31,000 in 10 years, $91,000 in 20 years, and $204,000 in 30 years.

Being aware of your money is the best way to control it.

Source
Half of All Americans Say They Lose Track of $2,000 In Cash Each Year
September 10, 2007

How Much Do YOU Spend On Gasoline?

Economists worry about rising oil prices because it tends to generate higher pump prices for Americans.  With more money spent on gasoline, there's (theoretically) less money available to spend on goods and services. 

Today, Gasbuddy.com says that the average price for a gallon of unleaded gasoline in Detroit is $2.86, up from $2.12 last year at this time. 

Now, as a country, it is estimated that we consume 146 BILLION gallons of gasoline annually.  That converts to 400 million gallons each day. 

Therefore, the 74-cent difference between today and last year at this time, costs Americans an additional $296,000,000 in fuel charges daily. 

And this doesn't account for premium gasoline or diesel fuel charges.

Consumer spending makes up roughly two-thirds of our economy so when gas prices rise, economists worry -- it means that less money is available to pump back into businesses, and that the economy should slow down.

The good news in this type of story is that people in the market for a new home loan may benefit.  A slowing economy tends to lead to lower mortgage rates.

Visa Tries to Sell Credit Scoring Services With Scare Tactics

Earlier this month, Visa USA published a "report" titled "Americans Unaware That Employers Can Legally Refuse to Hire Job Applicants with Low Credit Scores". 

What Visa USA said originally in the press release:

Many employers have made checking a credit score a mandatory part of the job application process, just as drug testing and criminal background checks are now common requirements for jobs in many industries.

How Experian spokeswoman Maxine Sweet contradicts Visa USA:

"We do not score for employment reports.  If you chose to do that, I think you would be breaking the law."

How Fair Isaac spokesman Craig Watts contradicts Visa USA:

"Credit scores don't help employers make smarter employment decisions.  They are for judging credit risk."

How the Fair Credit Debt Reporting Act contradicts Visa USA:

The Fair Debt Credit Reporting Act restricts employers from using credit reports for hiring or employment decisions. If such a report is made, companies are required to advise the applicant or employee that the report is being ordered, together with the name and address of the credit agency supplying it. Finally, the report can be ordered only if it serves a legitimate business purpose.

How the EEOC's policies contradict Visa USA:

An applicant's poor credit rating has also been ruled by the courts to be an unlawful basis for refusal to hire unless a business necessity for such a policy can be established.  Inquiries about charge accounts and home or car ownership may be unlawful unless required because of business necessity.

What Visa USA said after being pressed by Detroit News columnist Brian O'Connor about all of the contradictions:

"We don't have figures on whether that's true or not, but anecdotally it seems that more and more employers are doing it."

Technically it is true that an employer can legally not hire you because of low credit scores, but the types of jobs in which a person would be subject to credit scoring scrutiny is limited to those very few jobs in which a person's credit rating matters for their job's basic functions.

And there you have it.  One more reason to read beyond the headlines.  Especially when the source of the information is a company with something to sell.

Sources:
"Americans Unaware That Employers Can Legally Refuse to Hire Job Applicants with Low Credit Scores", Visa USA.  September 13, 2007

Brian O'Conner. "Employers Myth Out On Credit Scores", Detroit News.  15 September 2007.

Why the Fed Was Going To Disappoint Today No Matter What It Did

It was all eyes on the Fed today; the market anxiously awaited the central bank's 2:15 P.M. ET press release. 

Some of the market bias towards a 0.50% rate cut had decreased in favor of a 0.25% cut.  That shift was largely psychological. 

Markets were trying to "get inside the head" of Fed chief Ben Bernanke, speculating about how he was going react in the first Federal Open Market Committee meeting since the credit crunch reached a head in mid-August.

The speculation and guessing tells us that there was tremendous uncertainty about the FOMC vote today.

Uncertainty in markets leads to volatility. 

No matter what the Fed decided to do (it ended up being a half point cut) a lot of traders, having bet they would do something else, were scrambling to reposition their portfolio because of "bad bets"

Have Americans Turned to Credit Cards Instead of Home Equity To Stay Afloat?

For most of the last seven years, Americans have been happily pulling money out of there homes in 'cash-out' refinancing of their 1st mortgage or acquiring home equity loans.  To a large part, people did put that money back into their homes in various home improvement projects, but another large part of that money was used for purchases.

Now mortgage lenders are pulling back on what they allow to be lent on a home and they require better credit then they did before.  So if the home equity ATM machine is closed, what's a consumer to do?

Credit card balances increased 12% and 8% during May and June.

Well if one form of credit is unavailable, then let's just move on to another.  Since overall spending was flat, but credit card balances increased, it's reasonable to assume that people are still using credit to live beyond their income means.  Gradually the collective balances on these credit cards will reach their maximum and then borrowing on cards will end.

When credit card borrowing stops then spending being supported by those cards will stop too.  Either people will find another form to debt to get into or spending will begin to fall.

When spending falls you run the risk of a recession, which in turn usually leads to interest rates to fall, which leads to more borrowing.  A relatively simplistic explanation of what economists and the Fed refer to as an economic cycle.

The problem is, once you've racked up huge amounts of debt, are you able to borrow again to keep the cycle going?  If mortgage debt and the housing market were trouble, what happens if Americans lose the ability to spend like they have because they're so deep in debt?

Source: "Consumer Credit Usage Spikes in June", Markham Lee.  9 August 2007

Why Banks Are So Fixated on 20% Downpayments. Is It Enough?

Why do banks like to see a home buyer make a downpayment of at least 20%?  Basically it's Two reasons.

1. Statistically speaking people who put down 20%, or who have 20% of equity in the property, were highly unlikely to go into foreclosure.  Banks don't like to foreclose so that seemed the safe amount to require people to put down when buying.
2. If the bank does foreclose then a 20% discount from the 'market value' was what the home usually ended up selling for.  If the owner had 20% equity then the bank typically didn't lose much, if anything on the subsequent sale.

Well now were awash in a tidal wave of foreclosures.   There is significant anecdotal evidence that the 20% rule isn't helping banks right now.

Looking at some recent bank sales the prices are going anywhere from 30-70% of the past sale.  So even if the buyer did put down 20% and the property sold at the high end the bank is still at a 10% loss on the property.  Having PMI would still put the bank at the same loss since PMI typically only insures the lender to the equivalent of a 20% downpayment.

In other words, banks in Michigan are taking losses on loans and on the underlying collateral, too.  This trend is part of the reason that several lenders have over the past year simply decided to pull out and not lend anymore in Michigan.  The lenders who have stayed are doing more rigorous reviews of appraisals.