As mortgage lenders continue to restrict their lending guidelines in response to the "subprime fallout" it is no wonder that mortgage originators are increasing their reliance on FHA & state sponsored first time home buyer programs to fill the void.
In Oregon we have the Oregon Bond program (http://www.oregonbond.us/). This particular program is offered through the Oregon Housing and Community Department and is funded through tax-exempt mortgage revenue bonds.
On the surface, the Oregon Bond program appears to be the "end all, be all" program for ANY first time home buyer. However, it is my goal with this blog post to inform you of the positive and negative aspects of this loan option.
Pro's:
*Low/ No down payment requirement- The Oregon Bond program has two down payment options for first-time home buyers. The first option called the "Rate Advantage" has a lower interest rate and carries a minimum down payment requirement of 3%. The second option called the "Cash Advantage" requires 0% down on the part of the home buyer. However, at the time of this posting the Cash Advantage program was temporarily suspended.
*Interest Rate- The Oregon Bond Program has a very attractive interest rate. At the time of this blog posting a borrower could lock in a 30 year fixed rate @ 5.75% for the Rate Advantage option. This is about .375% less than a comparable FHA option.
*Flexible credit approval- Like the FHA loan program the Oregon Bond loan can be fairly flexible in terms of an applicants credit score. Unlike conventional loans there are not adverse rate adjustments for applicants with lower credit scores.
Con's:
*Mortgage Insurance: The Oregon Bond loan program carries fairly expensive mortgage insurance requirements. Just like the FHA loan the mortgage insurance is structured with a 1.50% upfront mortgage insurance premium that gets financed into the loan plus a .50% monthly premium that is built into the monthly payment. For example, a $200,000 loan would get financed @ $203,000 to fund a $3,000 mortgage insurance policy at closing plus $83.33 per month.
*Recapture Provision: This provision is often overlooked by borrowers and loan originators but it can be a costly oversight. With an Oregon bond loan the home buyer may be subject to a recapture tax when the home is sold in the future. For a detailed explanation of this provision I would encourage you to research it at the Oregon Bond website. I will do my best to explain it here. The recapture tax is collected at a rate as high as 6.25% of the original loan amount if the home is sold within the first 9 years of the loan at a higher price than it was initially purchased for if the loan holder's income exceeds a certain threshold (currently about $70,000) at the time of sale. For example, a home buyer takes a loan out for $200,000 today to buy a home for $225,000. In 5 years, they decide to sell their home. At that time they sell their home for $275,000. If their household income at that time exceeds the threshold (determined at that time) then they would owe $12,500 (6.25% of $200,000) in recapture tax, even if they had refinanced during the course of owning the home.
*Inflexible guidelines: Although the Oregon Bond program is flexible in some degree (mostly credit and down payment) it is considered to be inflexible in other areas. For example, the program requires a 2-year work history in the same industry and school does not count. for many home buyers they have only been out of school for less than 2 years. These borrowers would not qualify for an Oregon Bond program but may qualify for FHA loans. Furthermore, there is a very limited set of Oregon Bond lenders to choose from. Therefore, an Oregon Bond application is subject to the underwriting tendencies of a few different lenders. This differs greatly from FHA where we can originate almost anywhere.
*Income limits: Unlike the FHA loan program the Oregon Bond loan program REQUIRES that an applicant be a first time home buyer (defined as not having owned in the previous 3 years) & may not have a household income that exceeds a certain level (depending on the county that the property is in). For the Portland-Metro area the income threshold is about $70,000 at the time of this post.
*Processing: Oregon Bond programs have to be reviewed by the lender and the state of Oregon. Typically speaking the process for getting an Oregon Bond loan is much more cumbersome and time consuming than a traditional FHA loan. We like to ask for 45-60 days to get an Oregon bond loan done whereas we can do FHA loans in a much shorter time frame.
Monday, June 30, 2008
Rate Update June 30, 2008
The weak stock market may continue to help mortgage rates move lower. However, a weakening dollar may raise inflationary concerns.
The European Union reported the highest year-over-year inflation reading in 16 years this morning. How can European Inflation impact mortgage rates in the US?
In order to combat inflation the EU will have to begin raising short-term rates beginning this Thursday. As the EU raises short-term rates it will reduce demand for the US Dollar because investors will be able to earn higher returns with the Euro. The weakening dollar will continue to push oil prices and other commodity prices higher which could exacerbate inflation concerns in the US.
Looking ahead this week we have the June jobs report set to be released on Thursday. With the 4th of July holiday on Friday we may see increased volatility because of fewer traders working in the markets.
Current Outlook: neutral
The European Union reported the highest year-over-year inflation reading in 16 years this morning. How can European Inflation impact mortgage rates in the US?
In order to combat inflation the EU will have to begin raising short-term rates beginning this Thursday. As the EU raises short-term rates it will reduce demand for the US Dollar because investors will be able to earn higher returns with the Euro. The weakening dollar will continue to push oil prices and other commodity prices higher which could exacerbate inflation concerns in the US.
Looking ahead this week we have the June jobs report set to be released on Thursday. With the 4th of July holiday on Friday we may see increased volatility because of fewer traders working in the markets.
Current Outlook: neutral
Friday, June 27, 2008
Fannie Mae continues to tighten their guidelines....
Fannie Mae released an announcement yesterday which indicated they are tightening some of their guidelines to qualify for a new mortgage. The reason this is important is because Fannie Mae dictates underwriting guidelines for virtually all mortgage lenders.
There is one guideline change within this announcement that we feel will be impactful and thought we should share it with you.
It involves a buyer who is buying a new primary residence but has yet to sell and close on their existing residence. In this circumstance the buyer is required to qualify for BOTH mortgage payments (BOTH= the proposed mortgage payment on the new house & the existing mortgage payment). However, currently we are able to offset a portion of their existing mortgage payment by giving them a credit for the market rent that their home would earn if they chose to rent it out (even if this is not their intention). This helps them qualify for the new house. However, Fannie Mae has changed that guideline to the following (bold and italicized copy represent the changes):
1) If current home is being retained as a 2nd home (basically no rental income needed to qualify, but home is not being sold) - qualify with the full PITI payment on both properties plus borrowers must have 6 months mortgage payments in reserves for both homes!
2) If the home is being retained for an investment property & rental income is needed to qualify, you need the following: a) Evidence that the borrower's have at least 30% equity in their current home, b) a copy of the fully executed lease agreement & c) evidence of receipt of the security deposit & deposit into the borrower's account. If the borrower's lack 30% equity (as verified by appraisal, AVM or BPO (Broker Price Opinion), you will also need 6 months' mortgage payments in reserve on both properties*!
With average market times increasing (Washington County currently around 70-80 days) this will delay buyer's ability to purchase a new home.
What you need to do?
Be sure your client gets pre-approved EARLY AND OFTEN!
There is one guideline change within this announcement that we feel will be impactful and thought we should share it with you.
It involves a buyer who is buying a new primary residence but has yet to sell and close on their existing residence. In this circumstance the buyer is required to qualify for BOTH mortgage payments (BOTH= the proposed mortgage payment on the new house & the existing mortgage payment). However, currently we are able to offset a portion of their existing mortgage payment by giving them a credit for the market rent that their home would earn if they chose to rent it out (even if this is not their intention). This helps them qualify for the new house. However, Fannie Mae has changed that guideline to the following (bold and italicized copy represent the changes):
1) If current home is being retained as a 2nd home (basically no rental income needed to qualify, but home is not being sold) - qualify with the full PITI payment on both properties plus borrowers must have 6 months mortgage payments in reserves for both homes!
2) If the home is being retained for an investment property & rental income is needed to qualify, you need the following: a) Evidence that the borrower's have at least 30% equity in their current home, b) a copy of the fully executed lease agreement & c) evidence of receipt of the security deposit & deposit into the borrower's account. If the borrower's lack 30% equity (as verified by appraisal, AVM or BPO (Broker Price Opinion), you will also need 6 months' mortgage payments in reserve on both properties*!
With average market times increasing (Washington County currently around 70-80 days) this will delay buyer's ability to purchase a new home.
What you need to do?
Be sure your client gets pre-approved EARLY AND OFTEN!
Rate Update June 27, 2008
This morning’s Personal Consumption Expenditure Report (PCE) showed that core inflation increased in line with analysts’ expectations. This is good news for mortgage rates because there has been a lot of concern over growing price pressures in our economy (inflation is the primary factor that drives mortgage rates).
With the stock market indexes losing value, oil prices over $140/ barrel, and continued fears in the financial industry there is a lot of uncertainty in the markets right now. BAD NEWS TENDS TO BE GOOD FOR MORTGAGE RATES because investors view bonds as a “safe-haven” for their investment dollars. In times of uncertainty bonds tend to get bid higher in price which pushes yields lower. We think mortgage rates have a good likelihood of moving lower amid all this uncertainty.
Current Outlook: floating bias
What is Personal Consumption Expenditure (PCE)?
The Core PCE excludes the volatile food and energy components from a measure of price changes in consumer goods and services. It consists of the actual and imputed expenditures of households and includes data pertaining to durables, non-durables, and services. It is essentially a measure of goods and services targeted towards individuals and consumed by individuals. This report is the Fed's favorite gauge on inflation.
With the stock market indexes losing value, oil prices over $140/ barrel, and continued fears in the financial industry there is a lot of uncertainty in the markets right now. BAD NEWS TENDS TO BE GOOD FOR MORTGAGE RATES because investors view bonds as a “safe-haven” for their investment dollars. In times of uncertainty bonds tend to get bid higher in price which pushes yields lower. We think mortgage rates have a good likelihood of moving lower amid all this uncertainty.
Current Outlook: floating bias
What is Personal Consumption Expenditure (PCE)?
The Core PCE excludes the volatile food and energy components from a measure of price changes in consumer goods and services. It consists of the actual and imputed expenditures of households and includes data pertaining to durables, non-durables, and services. It is essentially a measure of goods and services targeted towards individuals and consumed by individuals. This report is the Fed's favorite gauge on inflation.
Thursday, June 26, 2008
Rate Update June 26, 2008
Some mortgage programs saw improvements to rates this morning.
As expected the Fed kept rates unchanged yesterday afternoon. Watch today’s you tube video to better understand what they said and how it may impact mortgage rates.
Attention will now be focused on tomorrow’s Personal Consumption Expenditure (PCE) report. This report includes the Fed’s favorite gauge of inflation.
Current Outlook: neutral with a floating bias
What is Personal Consumption Expenditure (PCE)?
The Core PCE excludes the volatile food and energy components from a measure of price changes in consumer goods and services. It consists of the actual and imputed expenditures of households and includes data pertaining to durables, non-durables, and services. It is essentially a measure of goods and services targeted towards individuals and consumed by individuals. This report is the Fed's favorite gauge on inflation.
Wednesday, June 25, 2008
Rate Update June 25, 2008
Rates are higher this morning.
The big news event of the day will take place today at 2:15 EST when the Fed gives their post-meeting statement. We already know that the Fed is likely to leave rates unchanged. What is more important is how they craft their language. Watch today’s you tube video to understand what we’ll be listening for.
Current Outlook: neutral ahead of Fed meeting
Tuesday, June 24, 2008
Rate Update June 24, 2008
Mortgage-backed bonds are trading higher this morning which has helped rates remain unchanged from yesterday despite a sell-off in the afternoon.
The bond market is benefitting from a weak stock market. Over the past week I’ve referenced the impact that the stock market can have on mortgage rates. For a detailed explanation please search for the article, "how the stock market impacts mortgage rates" on this blog.
Tomorrow at 2:15 EST the Fed will give its monetary policy decision and post-policy statement. It is widely expected that they will leave rates unchanged. What is more important is how they craft the wording of their statement. We’ll break this down in tomorrow’s ‘rate update’.
In real estate news, the S & P Case-Shiller Home Price Index report was released today. It revealed further losses to home values in all 20 major metro areas that it follows. To view the report please visit this link.
Current Outlook: neutral ahead of Fed meeting
The bond market is benefitting from a weak stock market. Over the past week I’ve referenced the impact that the stock market can have on mortgage rates. For a detailed explanation please search for the article, "how the stock market impacts mortgage rates" on this blog.
Tomorrow at 2:15 EST the Fed will give its monetary policy decision and post-policy statement. It is widely expected that they will leave rates unchanged. What is more important is how they craft the wording of their statement. We’ll break this down in tomorrow’s ‘rate update’.
In real estate news, the S & P Case-Shiller Home Price Index report was released today. It revealed further losses to home values in all 20 major metro areas that it follows. To view the report please visit this link.
Current Outlook: neutral ahead of Fed meeting
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