Michigan Loan Experts

Why PMI is coming Back

Well it never really went away, at least not completely.  But just a few short months ago, PMI was frowned upon by 'sophisticated' borrowers and financial gurus.

Why pay PMI, an insurance 'with no benefit to you', when you could just as easily get a combination 1st and 2nd mortgage.

First off, let me dispel the myth that PMI is 'of no benefit'.  PMI is that wonderful innovation that lets people buy homes without putting 20% down or paying nosebleed interest rates.  Sounds like a fair trade, after all, if you have no money you can still get a home.  Not bad I'd say.

But people still hated PMI since it wasn't tax deductible and everyone hates to pay anything labeled as an 'insurance'.  So lenders invented the 80/20 loan.  You take out two mortgages with the 2nd mortgage being able to allow waiver of PMI and it was tax deductible too.  Usually it did work out to be better to do an 80/20 than to pay PMI.

Now the mortgage crisis.  2nd mortgages are still a mortgage and are sold on Wall Street like every other mortgage.  Since Wall Street isn't buying loans like they used to, the pool of money for 2nds is drying up.  Many 2nd mortgage lenders have gone out of business and credit standards have tightened. 

Now it's much harder to get an 80/20 loan and some lenders like Countrywide (which isn't going out of business) have eliminated them altogether.

This perfect storm will lead to a resurgence of PMI as the only viable way of putting less than 20% down.  Plus, with recent tax law changes enacted in January, PMI is now tax deductible for loans closed in 2007 if certain requirements are met.*

Source: "PMI Deduction Buried In The Closing Acts of Congress", Mortgage News Daily.  29 January 2007.
*Always consult a tax professional to see how tax laws affect your personal situation and if you personally qualify for the PMI deduction.

Absorbtion Rate Primer

Absorption Rate is a real estate term for the length of time required to sell all of a given stock in a given area. 

Savvy real estate agents use it to show sellers how quickly homes are selling in a neighborhood.

Absorption Rate calculation is simple:

• Take the number of homes on the market
• Divide it by the number of closed home sales in the last month.

For example, if 100 homes are on the market now and 9  homes closed in the past 30 days, the absorption rate is 100/12, or 8.33 months.

 

In this example what it means is that with just the homes on the market now it will take over 8 months to sell them all.  A very high number indicates a very buyer friendly market.

New Home Sales Up....Don't Bet on It

A recent Commerce Department report showed that new home sales rose 2.8% in July.

Wow!  All the news about bad real estate markets must not be affecting builders too badly if their sales are going up.

Well let's not get too excited.  The Commerce Department report sounds great but like all reports it's only as good as the information it actually collects.  In this case, it only collects the number of new contracts signed.

Whether those buyers who sign the contract actually close is another thing.  Back in November 2006 information indicated that many builders were seeing cancellation rates of up to 40%.  There has been nothing new to show that those cancellation rates have subsided.  So even if people are signing contracts many are not going to closing. 

Why would people cancel a contract?

• Buyers couldn't sell their current home.
• Buyers see builders lower prices on identical buy unsold properties in the same development and decide to back out when the builder wont' match the price cut for them.
• Buyers can no longer get financing to match their financial situation.

So buyers may sign a new home contract, but until it actually closes it really isn't a sale.

A Mortgage Market in 'Crisis', but not for Everyone

As I'm reading the headlines today, it is another day of 'the sky is falling'. Yes, things are very difficult, and in Michigan it's really really difficult; but it's nowhere near as bad as the media make it out to be.  The media's job is to sell newspapers or capture eyeballs; I'm sure reporting newsworthy items is in there too, but the media is pretty heavy into ratings and papers sold.  Yelling 'CRISIS'  is one way to get peoples attention on the TV and the newsstand.

1. Mortgage brokers and lenders are still making thousands of new loans every week.
2. Over 99% of full documentation, good credit conforming and jumbo mortgages were not late.

So if you are willing to submit tax returns, W-2s, bank statements, and other financial data along with your loan application, then you can still get a loan are great rates.  The vast majority of homeowners have credit scores over 620.  The people who are really in dire straights, the scores of 580 or less have much higher default rates but they also represent a small percentage of the population. 

The credit market troubles with home loans for people with good credit are inconvenient but are mostly limited to those that are self-employed, commissioned or generally unwilling to document their finances. 

If you do feel you are in over your head then talk to your loan officer or bank holding your mortgage.  Remember, if you really are having trouble, talk to the bank.

Viva la French

If anyone thought the subprime meltdown did its thing earlier this year and was now over, then the last week was a major wakeup call.  Not only has it returned with force but it is spreading through the rest of the market.

A few days ago a French hedge fund suspended redemptions from it fund.  According to its press release, because it was invested in mortgage securities and the problems have become so widespread, that it was no longer possible to calculate a correct value for its assets; without a correct value it was impossible to allow people to redeem shares until a correct value could be determined.

The market responded with a strong negative reaction.  Not only has the US mortgage problem spread internationally, but it's spreading in the US market.

Just last week another top 10 wholesale lender closed its doors, and Countrywide stock was hit over fears of slow paying home equity clients.

What does it all mean for the economy.  Well, everyone and their neighbor isn't facing foreclosure and consumer spending is still strong.  Credit will probalby tighten a bit but the overall economy is unlikely to get too far off track. 

Still the next few months will see record numbers of ARM payments resetting and that will send a shockwave through many communities as foreclosures inevitable rise.  The best advice is to keep an eye on the overall market and if you personally are having trouble with your mortgage then talk to you lender quickly.  They do want to help.

Source: "Mortgage Meltdown Contagion", Les Christie. 10 August 2007

Is the Fed Trying to Help the Market?

In its press release yesterday, did the Fed intentionally ignore the impact of credit markets in order to prevent a full-blown financial panic?

According to the text, Bernanke & Co. are still watching inflation intently and its long-term economic view precludes it from acting upon last week's drastic credit crunch.

And, in the wake of the Fed's statement, pundits are in agreement that the Fed seems unconcerned about credit market deterioration.  They also note that the Fed is sending a signal of confidence about the U.S. economy on the whole.

Is the Fed using psychology to keep the economy strong?  If enough people say the economy is strong does that make it so?