What Happends To Home Financing As Government Unwinds Agency Lenders
March 31, 2011 by admin
Risk to Homeowners after Fannie and Freddie Winds Up
This past week the Government affirmed its desire to unwind Fannie Mae and Freddie Mac and push the secondary mortgage market out of governement subsidy and guarantee and closer to becoming fully privatized. The expected transition is likely to last for at least ten years and a number of hurdles to this move will be present, first and foremost is the lack of demand from private investors to purchase mortgage backed loan securities. The transition could take longer depending on the state of the U.S. real estate marketplace, home foreclosures and the general economy. The one item that is all but certain is fixed mortgage rates will certainly be moving higher. We examine the effect on the 30 year loan rate specifically:
THE 30 year fixed rate loan is an anomaly that has been able to sustain because of the government support. But now with government intending to wind up Fannie Mae and Freddie Mac, this 30 year fixed home finance can become am ‘elite’ product rather than the norm. This type of shift can have far reaching economic repercussions that the policy makers should look into. There are basically three aspects of the much-talked about 30 year fixed rate long:
1. Long term nature
2. Fixed Interest Rate
3. Full amortization
1. Long-term nature of the loan: 30 year is a loan that demands long-term commitment. As against this, commercial loans are usually between 3 and 10 years. Commercial borrowers are more in a disadvantageous position because they have to refinance frequently compared to residential borrowers. In a long-term loan, homeowners are not tied to the refinancing risk with the speculation about what if no lender is agreeing to lend money against the house, risk of interest rate and closing costs.
2. For a residential borrower who is taking fixed-rate loans, there is not much of a perceived risk because interests remain more or less the same. Lenders have a different take on this, and they do not fancy fixed rate loans because they have to offset the risk with other financial products. Lenders can leverage floating rate mortgage loans to their benefit, shifting the risk to the borrowers.
3. The normal residential mortgage can be fully amortized which implies that the at the end of the thirty year term, the principal will have been paid in full, reducing the borrower’s refinancing risk to a great extent. She may never even have to refinance if she can afford her mortgage. But when we talk about short-term commercial loans, they are partially amortizing; this means even if the loan amortization is for 30 years, they have to be paid in four to ten years.
This makes the borrower go for the refinancing option which means the lender’s side can benefit handsomely. According to economics, due the nature of the 30 year mortgage loans, residential borrowers have been at a better position than commercial borrowers during financial crisis. Though 25 percent of homeowners in America are ‘underwater’ on their mortgages, meaning they have more debt compared to the actual value of their homes; one thing is sure: if they do not default on their present payment and do not have to relocate, they can still wait for the economic downturn to turn for the better and sell it or refinance when the value of the homes bounce back.
While the equity gap for residential under-water borrowers is estimated to be $751 million, the same gap for commercial real estate borrowers is more than $1 trillion. Due to the short-term nature of commercial loans, borrowers with loans have been forced to sell it anyway, surrender their properties to lender through way of foreclosure or deed in lieu of foreclosure or refinance by putting in more down payment. You can imagine how much increasing stress an underwater homeowner will have to face, even if he is current on mortgage payment but has to tender a maturing loan, if the tenure is reduced from 30 years to 10 years.
From the above, we can assume that if the government shifts the focus from the standard 30 year fixed rate interest loan, there could be drastic repercussions for the homeowner. For instance, if the homeowner has to shift to the 10 year, floating rate which is partially amortizing, then homeowners will have to bear the risk of high interest rate, increase costs, the ‘equity gap’ in the prospect of homes getting devalued and of course, refinancing risk. By the way things are shaping up; fewer American may own a home and even may have to compromise with their idea of a huge, dream home.
Though the government says that removing the 30 year old fixed rate interest is actually good because on a long-term basis, the cost of the home is reduced; it is not really a good thing to impose this change in the wake of an economic recession with an already stressed housing market. So even if the policy makers have economics in their mind, they should consider the drastic repercussions that can leave a huge dent in the financial reserves of people, on a short-term basis.
Homeowners Insurance, How Much Coverage Do You Need?
March 24, 2011 by admin
People work long and hard just to be able to afford to own a home. For some, they spend many years saving money to buy their dream house. At last, after dreaming about it for so long, they have finally seen the fruits of their labor—a 3-bedroom house in a friendly suburban neighborhood, with white picket fences and manicured lawns. But six months later, the house becomes badly destroyed due to flood damage, and because their homeowners insurance didn’t have flooding coverage, the owners are left devastated.
Such a scenario is something that a lot of people could relate to, especially now that the global climate change has triggered terrible effects all over the world—this country included. In the past couple of years alone, forest fires, earthquakes, floods, hurricanes, and storms have wreaked havoc to countless homes and commercial properties. These things would often make homeowners wonder, how much insurance do you really need? Read on to find out the answer.
Property Assessment
One of the very first steps to take when determining how much coverage you need is to find out exactly how much your home is worth. Determine the value of the property and its contents. Now this is easier said than done, and although you can opt to get a ballpark figure, say $150,000, it is always better to really make an accurate assessment by going to each room and calculating the cost of each item that you have there. Check the market prices of houses similar to yours and get an estimate from your contractor. You need to know exactly how much it would cost to have a full replacement of your home.
Personal Property Coverage
Aside from this, you also need to assess just how valuable the contents in your home are. If you have expensive jewelry, antique items, high-end appliances, and pricey paintings then it would be wise to get a policy that offers a guarantee for personal property replacement. Most insurance companies offer only a 50% coverage for personal property, which isn’t really enough for high value contents.
Liability Coverage
Liability coverage is another thing to ponder on. Homeowners have liability when it comes to their property, which means that if someone gets injured while he or she is within your home, this person could sue you for it. Without sufficient liability coverage, you are in for a very huge financial problem. Most insurance companies offer only minimal liability coverage, and if you have an expensive home, then it may be a good idea to increase the coverage.
Flooding/Earthquake Protection
A very important consideration is to whether or not include protection for flooding and earthquake damage. Keep in mind that these things are not included in the basic homeowners insurance policy and you will need to get them separately. If you are located in high-risk areas such as a flood zone, as designated by FEMA, it is always wise to spend a little bit more for coverage.
March 23, 2011
March 23, 2011 by admin
Stocks moved higher on Wednesday following investors returning to equity markets as the DOW is back above the 12,000 point level. The majority of investors are temporarily looking past the Japan earthquake disaster and the political unrest in Egypt. Equity markets have enjoyed nearly a 500 point rise in the past week, moving past the market turmoil. The real estate market continues to be the economies Achilles heal and has shown no signs of improvement. Today’s report showed new home sales at their slowest pace in fifty years and the median sales price is close to falling below $200,000. New home sales are presently on pace of approximately 250,000 units, almost 500,000 units lower than the peak levels of the mid 2000′s.
The changes in the equity markets have not altered the downward momentum for fixed mortgage rates in March. Most national mortgage lenders were offering thirty year loan terms at 4.82% this week and fifteen year loan terms were just above four percent. The lower rates will help consumers with refinancing and those considering purchasing a new home can opt for more purchasing power or lower house payments. The FOMC remains committed to keeping long term mortgage rates low for the balance of 2011, which is great news for consumers. Yields on the closely followed ten year treasury bond drifted up to 3.34 percent on Wednesday, but are almost fifty basis points lower than their 2011 high point.
The future of conventional 30 year mortgage loans
March 21, 2011 by admin
The potential end of Fannie Mae and Freddie Mac Brings About a New Challenge
At this point of time, there are divided opinions on who is really right: Fannie Mae and Freddie Mac who made it quiet convenient for people to benefit from 30 year old fixed-rate mortgage or the government which is keen to do away with this concept as it has been found out that these housing finance giants had embezzled more than $134 billion from the market. It remains to be seen what the housing scenario would be, once Fannie and Freddie becomes history.
The Treasury Secretary Timothy Geithner had recently said that the cost of mortgage of rise since the government will be less involved in the mortgage market. There is going to be a difference of more than $600 per month on a loan of value $300,000, a huge amount no short of a burden for the middle –class from buying homes. Also one fears a divide among strata of society, following this move.
Let us consider the experience of Peter Doug, a guy in his early 30s, he like many others invest in the urban civic space. He eats and drinks in local restaurants and has a small business in the neighborhood. He enjoys the infrastructure and has his kids studying in schools here, who even have a nice time playing in the park in the evening. Peter feels that he has a financial stake in the municipality here, because of his homeownership. But what about someone who is trying to buy a home? People in their 20s and early 30s have smaller or modest level of savings as they are just building their careers and the economic downturn is doing them no good. So a 15 percent or even a 20 percent amortization is definitely going to a 25 year old’s aspiration of owning a house, out of the window.
After the winding up of Fannie and Freddie, the private players have to run the show and they will, keeping their interest in mind. So, there will be quite a big shift as the youths would move to the suburbs. There are affordable housing development regulations which only have limited appeal. What people need is affordable, long-term servicing of housing debt but with the 30 year old fixed rate mortgage out of picture, the idea of people going for vibrant, urban spaces will cease to exist.
The middle-class buyers who form the biggest part of home-buying circle will have to shift to affordable places to live. The high cost of mortgage will make people relocate and of course, there is going to be environmental hazards coming to the fore. For instance, if people move to the suburbs, it means more time to come to their workplace in the towns, that means more traffic pollution, environmental waste, over-usage of fuel as more time is spent on car travel.
Financial players do have self-interest in their mind, which they will exploit to the best level possible. Fannie and Freddie may be accused of subverting funds but still they managed to make life easy for the homeowners but with the government keeping its hands away from them and winding up the 30 year old fixed rate loans, the private players will make most of the situations and give loans with shorter tenure and price them as they would for short-term commercial loans. So, you have to be prepared for increasing cost of loan, high interest rate, fees to be paid for things like locking-in interest that was unheard of during the times of Fannie and Freddie. The residential buyer may be in a panicky situation and will go for more refinancing options to tide against the high costs. With banks have to bear risk on their own with no Fannie or Freddie around, they will be happy to pass on the risk to the residential borrower.
The government still likes to believe that people were really playing more than needed when they would stretch their payments over a 30 year period, but it really didn’t pinch them as much. But now with lesser payment tenure and pressure to pay the money quicker and in larger lump-sums, the pressure may just add to the worsening real estate market. It remains to be seen what the outcome would be, but in all probability, the banks and private players would have to work together and come out with a good deal for the borrower comparable with what Fannie and Freddie would give, if they have to remain in the business.
March 16, 2011
March 16, 2011 by admin
The global markets appear to be regaining some certainty following the recent devastation caused by earthquakes and tsunamis in Japan. The DOW pulled back from sharp losses on Tuesday and international stock markets appear to be finally pulling out of the tailspin. During the past thirty days, equity markets have faced tremendous pressure from global and political events. The crisis in Egypt and Libya led to a sharp increase with oil prices and dramatic volatility of equity markets.
With the dramatic sell off affecting the equity markets, investors have been on a flight to safety and investing heavily into bonds. This move has led to a major decline in yields for almost all bonds, including the Ten Year Treasury bond which has gone from well above 3.7% down to 3.26% in early trading on Wednesday. The major shift bond yields has dramatically impacted fixed mortgage rates for both fifteen and thirty year loan terms. As of this week, most national mortgage lenders are offering thirty year loan terms around 4.7%. Over the past thirty days, interest rates have come down nearly ½ point on both fifteen and thirty year terms, leading to a large spike in activity for mortgage lenders as consumers look to refinance their properties.
The great improvement with interest rates has yet to impact the real estate market in a positive way in 2011. New construction and resale home sales have been trending lower than expected, with the most recent report from the home builders association showing a large pullback with in new construction building rapidly accelerating. The pullback with home building is the largest on record over the past two years and further proof the struggling housing markets are likely to take many years before recovering.
The end of 30 year Fixed Rate Mortgage: Good or Bad?
March 11, 2011 by admin
Homeownership in the US is going to witness a drastic change if the federal government winds up the house financing giants, Fannie Mae and Freddie Mac. However, borrowing may become costly; especially the 30 year fixed rate mortgage; which is poised to become a luxury product, according to experts. The Obama administration and the House Republicans may have the agenda clear but it is still going to take years for this proposal to materialize; the market has to mature slowly, breaking out of the dependence of the financial banking provided by these housing finance giants.
Fannie and Freddie have been accused of misusing the government’s supports and subverting funds to shareholders and executives by backing up lots of slapdash loans. To clean this mess, the taxpayers have had to part with money in excess of $135 billion. Now, it remains to be seen if the government is able to win the confidence of people, especially the middle-class borrowers by giving loans at low interest rates, better terms and giving mortgage even when other banks shy away from giving loans.
Republican and Democrats believe that the price is still going to be high. They would prefer the government to go on a back footing and let the market dictate the loan availability, terms and price. The reason why Fannie and Freddie have been able last for such a long time is because they allowed people to borrow at lower rate because of the investor confidence. They had no qualms putting in money in the two companies that they were fine to accept relatively modest returns.
The investors had the faith the money will be repaid even if the borrowers defaulted, a promise actually borne fruit by tax payers. As of now Fannie and Freddie support 90 percent of the new mortgage loans because lenders are not able to raise finances for mortgages which are not backed by government guarantees. People who are in favor of a private mortgage market want the government to withdraw its support so that the investors can breathe easy. They believe that the interest rates will fall back into the same pattern that used to exist before the financial crisis.
Fannie Mae and Freddie Mac are pro-borrower because house ownership is made more affordable by allowing borrowers to repay the loans with fixed rates over a long period, say 30 years. So, the monthly installment that the borrower pays is well within his reach and is not a dent on his funds. The borrower’s favorite, the 30 year loan came into existence due to an act of Congress in 1954 and since then, it has been a favorite of the common man. Though the borrowers are happy, the investors were and are not in favor of such a long-term risk. They would rather prefer loans with adjustable rates so that they can make money quickly.
However, though it seems that the fixed-rate mortgage is good for the humble borrower, it really is not so. With no federal guarantee, these 30 years old fixed mortgage may be difficult for borrowers to find, they may have to come up with a larger down payment and a better credit score. But if you look at the larger picture, this is actually a benefit to the borrower.
A 30 year old fixed mortgage actually increases the overall cost of the loan; the borrower has to pay much more than the value of the house, he keeps on paying interest for a longer period. Also, it has been seen that in the last few years, borrowers with adjustable-rate loans paid lesser money as interest rates dipped, while the ones who have been on fixed-rate mortgage have to pay the same amount monthly for homes that have fallen down in value.
If one look at the whole housing scenario in the US objectively, one can sense the the 30 year old fixed mortgage is the reason for the housing market to be in bad shape. In fact, such loans are not so easily available in many countries, one of the reasons enough to say that it is not really the most viable product.
Fannie and Freddie would allow borrowers to take loans easily, which in turn gave them confidence to create scurrilities that were easy to buy and sell. The future ahead looks different with fewer borrowers qualifying for the best interest rates. Fannie and Freddie had reduced the down payment requirements in the past few years with the reasoning that they were trying to help people with modest savings become home owners. So between the years 1997and 2005, borrowers whose loans were guaranteed by the companies made a down payment of less than 10 percent. But since people who invest less and more borrow more, default in excess than others who take less from the market, Fannie and Freddie’s spoon feeding proved to be counterproductive.
The Obama administration has insisted that the borrowers pay a minimum of 10 percent as down-payment. The ‘lock-in’ interest has also to be paid for by the borrower, if he wants this interest rate to sustain weeks or months before taking the loan, something that has been unheard of. This is because when Fannie and Freddie were going strong, they would allow the lender to make such promises without any risk because they already had investor confidence. But with no companies now, the borrowers may have to pay for the lock-ins. So, it is now clearly up to the government to bring homeowners from troubled waters.
March 9, 2011
March 9, 2011 by admin
The stock market traded sideways on Wednesday as investors are still very nervous about the rising price of oil and new credit problems arising out of Portugal. Oil prices were relatively unchanged on Wednesday following the direction of the DOW. Despite a relatively flat trading market, bond yields dropped lower by almost ten basis points as the ten year bond traded down into the mid 3.45% range. The dip in bond yields, has pushed refinance rates lower, sending a large spike of refinance loan applications for homeowners last week as reported by the MBA today. There was another interesting report released today regarding home mortgages, this one was not as beneficial to the real estate market as new statistics indicated that homeowners mortgage became further underwater in the past sixty days, driving negative equity higher as home values across the country have declined.
Most national mortgage lenders are offering thirty year loan rates below five percent again and fifteen year loan programs are well below five percent. It appears that the lower rates have been well marketed by mortgage lenders and banks as the spike in loan volume refinancing indicates. This is a relatively quite week on the economic news front, so oil prices and political news will continue to drive the market direction. It’s never a bad idea to lock in rates with a float down option to secure the new lower interest rates this week.
March 2, 2011
March 2, 2011 by admin
Turmoil and political unrest in Egypt continue to be a challenge for global equity markets. The political revolt against Ghadafi continues to escalate with violence and bloodshed leading to UN sanctions and growing concerns that the Country could soon find itself in a civil war. Oil prices have been significantly impacted by the turmoil as the cost of a barrel of oil is now over $100 per barrel and gas prices in the U.S. are well above $3 per gallon and approaching $4 per gallon in numerous metro marketplaces. The rising price of oil has created inflationary pressure in the economy and could pose a challenge for the recovery pace this year.
This is a busy week for economic reports in the U.S. with Friday’s non farm payroll report poised to steal the show. The private sector ADP report showed job growth exceeding 200,000 hires last month, a solid indication that the economy is beginning to gain some footing in the important labor sector. The DOW has been sharply impacted by the challenges in the Middle East and has a real shot of losing its hold on the 12,000 trading levels.
One area to benefit from the problems in Libya has been for consumers in the market for a home mortgage. Interest rates have eased off of their previous highs, following a dip in bond yields from 3.74 down to 3.41 percent. This dip in bond yields correlates to a drop in fixed mortgages on thirty year loan terms from 5.25% to just under 5% with most national mortgage lenders. Rates on fifteen year loans remain under five percent and the improvement with rates has help mortgage lenders with an uptick in refinancing loan applications over the past week. March is generally a month that sees a volume increase with home purchase loans as well and the dip in rates could help boost the real estate industry and home sales over the next few months.