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Been Here Before

Thanks to JBREC for the chart, and article!

https://www.realestateconsulting.com/speedy-escape-from-housing-market-slump-unlikely/

An excerpt:

In the mid-1990s when 30-year fixed mortgage rates climbed over 9%, ARM usage jumped to 35% of all mortgages. In 1999-2000 as 30-year fixed mortgage rates shot above 8%, ARM usage raged once again to 34% of all mortgages. For comparison, the percentage of homebuyers using ARMs today is just 9%, even as housing affordability resides near its all-time worst and 30-year fixed-rate mortgages have more than doubled in the span of 19 months. As noted by the CEO of KB Home during its Q3-2022 earnings call September 21st: “We have some great and compelling interest rates on adjustable mortgages, where it’s a 10-year fixed. And if I were a buyer, I would take that in a minute. Those [rates] are couple of hundred basis points lower than the 30-year fixed, and nobody is taking it so far.”

Back in the day, ARM usage around here was probably more like 2/3s of the loans, instead of 1/3 of mortgages nationally.  Rarely did anyone think they were buying their ‘forever’ home, and moving again within 2-5 years was the plan.  I used to just go back to my past clients every two years!

It when I coined my all-time favorite slogan, “Don’t unpack, I’ll be back!”

I predict that over the next 3-6 months, the mortgage industry will be heavily advertising alternative loans like the short-term (5-year and 7-year) fixed rate, or the 2/1 buydowns.  These were the products that kept the party going after the new 2-out-of-5-year law was passed in 1997, and serial movers could cash out tax-free every couple of years and buy a better home.

It was later, around 2004-2005, that Countrywide developed their toxic version of the neg-am loan, and then was offering 100% financing to anyone with a 700 credit score that the bubble started popping.

I think we are all convinced that the Fed is going to deliberately cause a recession in the next 1-2 years, and will have to lower rates again – and continue their biggest boondoggle in history.  Anyone who buys with an adjustable-rate mortgage can refinance to a lower 30-year fixed rate then.

Wouldn’t it be great if the mortgage industry brought back the convertible loan where you could change your ARM into a fixed rate without having to refinance!

The key to igniting the demand will be a 3-handle, and it’s already in some ads:

Some listing agents are offering a seller credit to buy down the mortgage rate, but it’s vague and uncertain. Will it be enough to make a real difference? Do I have to go through your lender to get it?

I think the mortgage industry needs to advertise the specific rates and terms to gain acceptance in the marketplace.  Buyers have only been thinking about getting a 30-year fixed, and will be slow to consider an ARM.  But it might be the best hope of a softer landing.

Trigger Lead

From a buyer who recently applied for a mortgage:

Buyer: I’ve had about 40 calls since 7am this morning for mortgages.

I didn’t take any of them and most of them are leaving VMs and texts saying they got notified by Experian that my credit was pulled for mortgage purposes and they want to help. Not sure why and how Experian is sharing my information. I am sure there is a fineprint somewhere.

Lender: It’s not uncommon these days unfortunately. It’s called a trigger lead. Very annoying thing the credit bureaus do.

Here is some info:

What is a trigger lead? When a borrower applies for a mortgage, the three credit bureaus take that information and sell it as a “mortgage lead” to any lender that is willing to pay for it. The “mortgage lead” has the borrower’s name, contact information and the date they applied for credit on it.

Why would someone buy a trigger lead? A trigger lead is a really good indicator that someone is in the process of refinancing or a purchasing a home. A lot of lenders feel this a great opportunity to try to steal the transaction for themselves.

Why is it so bad right now? With interest rates going up and refinance activity going down, most lender’s pipelines have begun to disappear. In response to that a lot of them are buying trigger leads right now.

Why doesn’t your bank do something about this? Unfortunately we do not have ability to block or restrict the credit bureaus from selling this information. This activity is not illegal, it’s legal for the credit bureaus to sell it as they are the owners of the data.

What can we do to help borrowers avoid this?  They can remove their information from being sold as a trigger lead. They can do this over the phone or through a website provided by the credit bureaus. Web link here: www.optoutprescreen.com  or phone here: 888–567–8688. This must be done before they apply for credit and can take up to 5 business days to process so this may not work for everyone.

Automated Valuations

We see on every listing how the estimated values jump all over the place.

On my Aviara listing, the initial estimate was $2,247,615, but once the home hit the open market, the red team lowered their estimate by $313,637 to $1,933,978. A few days later, they have INCREASED it by $205,143 to $2,139,121…….which are some wild swings in less than a week!

It appears that the automated valuations can be wrong by 10% to 20%, and the guys behind the curtain are manipulating them as needed. A scary thought if people are relying on them.

Do people rely on them?

There are probably buyers who are believers, and use them to decide how much to pay for a home.

But it’s even worse for sellers.  It’s been happening more and more that home sellers are putting more faith in their zestimate and Redfin estimate. If those estimates are higher than what their agent tells them, of course they want to list for a higher price and they wave around their computerized values as proof.

In today’s frenzy it may not seem to matter much, but there will come a day when accurate valuations will become more necessary.

Or will it?

Rob talks about the changes being made to the GSE’s underwriting guidelines below.

Fannie Mae and Freddie Mac are issuing more appraisal waivers based on automated property valuations! Usually it’s because the down payment is sufficient enough that they aren’t that worried about a default.  But once the guidelines are changed, won’t it just be a matter of time before appraisals as we knew them become extinct?

Forever Homes and Loans

Mortgage rates in July, 1985

After the TV show, Derrick and I were discussing the good old days when homes were cheap and everyone moved often.  He is a mortgage originator, so I asked him how many adjustable loans he has done this year.

His answer? None.

Back in the day, adjustable-rate mortgages were the preferred product. Look at the difference:

$300,000 loan amount

Monthly payment at 11.875% = $3,057

Monthly payment at 9.0% = $2,414

Difference = $643 per month!

Nobody looked too hard at the terms of the ARM because a) $643 per month was a ton of money back then, and b) no one planned to stay forever.  Home buyers could always refinance if they had to, but many solved their ARM concerns by moving again – heck, there were lots of homes for sale!

Then the 2-out-of-5-year tax exemption was passed in 1997 which really juiced the market.  Homeowners were rewarded with tax-free money for moving!

It was rare that anyone had the full $500,000 in net profit, mostly due to the lower home prices and because of other recent moves.  Yet many moved again just to say they got their tax-free money!

At the same time, the mortgage industry, led by Countrywide, flooded the market with an alternative – the interest-only mortgage with a rate that was fixed for the initial period, and you could choose 3, 5, 7 or 10 years.  Once those saturated the market, Countrywide stole the neg-am ARM idea from the S&Ls and spiked them with high margins, and, well, we know how that ended.

As the private mortgage companies exited the market, the government lowered rates, and backed Fannie/Freddie to provide market liquidity. For the last ten years, the only program being offered is the 30-year fixed rate mortgage, and because rates are so much lower than before, buyers didn’t mind.

The end result? Today, you never hear anyone buying a home for the short-term.

The combination of ultra-low rates and difficulty of finding a better home has locked in everyone into their current home.  Even if the current home becomes unsuitable, it beats moving again.

The low-inventory era is here to stay, and will likely get worse.

Payment Adjusted for Rate & Inflation

 

Thanks to just some guy’ for sending in this article comparing prices, rates, and inflation:

https://awealthofcommonsense.com/2021/03/what-if-housing-prices-arent-as-high-as-they-appear/

It’s a feel-good idea that inflation and lower rates can ease the pain of higher prices.  But recent pricing has been really painful for buyers!  Let’s apply the data to our local action (using 80% of MSP):

NSDCC Detached-Home Sales, February

Year
# of Sales
Median SP
Mortgage Rate
Monthly Pmt
2006
137
$833,000
6.25%
$4,103
2015
171
$1,110,000
3.71%
$4,092
2018
166
$1,289,005
4.33%
$5,121
2021
226
$1,736,000
2.81%
$5,714

It’s a nice idea, and higher rates did cool things down a bit in 2018. But today’s market is so explosive that we are blowing through all the usual stop signs – look at the number of sales!

My guess is that there will be additional sellers pulled forward from future years, just like with buyers – it’s too lucrative and tempting to find a way to sell now. Might it mirror the covid-recovery trend line?

Jumbo Rates & Qualifying

There was a mistake in the rate-check I posted on Monday (above).

The jumbo rate quoted should have been 3.37%, not 2.37%.

This article discusses the spread between the conforming and jumbo rates, which has been closer until recently. It mostly comes down to lenders having few options where they can sell the jumbos loans, where the government will buy every conforming mortgage you can send them:

Link to Article

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For anyone who might be concerned about mortgage defaults, I wanted to highlight these charts to show the risk level the banks are accepting on jumbo loans.  This is the safest-looking data I’ve ever seen – it would take a catastrophic event for us to have a mortgage meltdown like we had last time:

A credit score of 775, equity over 20%, and a debt-to-income ratio under 33% is a dream borrower!

Mortgage Underwriting is Loosening

We know that the ultra-low mortgage rates and tight inventory have been driving the market wild.

But here’s an extra boost – the strict mortgage underwriting that began in April is being relaxed:

Credit Loosening: According to the NFCI credit index, a composite measure of credit conditions, credit tightened dramatically in mid-April to its most conservative level since 2009 due to the increased economic uncertainty driven by impacts from the pandemic. Since then, credit availability has loosened, even reaching pre-pandemic levels in August. This credit composite takes into consideration many different credit indicators, giving a comprehensive picture of credit conditions in the U.S. When lending standards are tight, fewer people can qualify for a mortgage to buy a home. Likewise, when standards are loose, more people can qualify for a mortgage and buy a home. Credit loosening in August compared with last month increased housing market potential by 266,640 potential home sales.

https://blog.firstam.com/economics/housing-market-potential-reaches-highest-level-since-2007

The graph above is somewhat misleading because they are only reflecting the month-over-month differences.  The improvement of ‘house-buying power’ due to low rates has already been in place for months now, so the increase from July isn’t that dramatic.

I’ve heard that the qualify-using-bank-statements mortgage is back, so that will add a few self-employed buyers who can’t qualify using their tax returns. More competition!

Mortgage-Rate Differences

Today we should see another all-time-low record in mortgage rates!

What is the impact?

Here’s how it pencils:

If we just go back to the 52-week high of 4.75%, you could borrow $808,000 and pay $4,215/mo.

If you shopped around to get a 3.0% jumbo rate today, you’d pay a point or so, but you could borrow $1,000,000 and have a payment of $4,216 per month.

Within a 12-month period, the borrowing power has gone up from $808,000 to $1,000,000 with no change in payment!

This is why sellers don’t mind pushing their list prices – they want to share in the benefit!

‘Need to Nest’

More purchase apps reported today:

Buyers are rushing back into the housing market, enticed by record low mortgage rates and a pandemic-induced need to nest like never before.

Mortgage applications to purchase a home rose 4% last week from the previous week and were a remarkable 21% higher than one year ago, according to the Mortgage Bankers Association’s seasonally adjusted index. That was the ninth consecutive week of gains and the highest volume in more than 11 years.

“The housing market continues to experience the release of unrealized pent-up demand from earlier this spring, as well as a gradual improvement in consumer confidence,” said MBA economist Joel Kan.

Plus the loan-qualifying by bank statements (instead of tax returns) is coming back – though with 15% down payments, instead of 10%:

Mortgage Rates Rising

Just like the price of gasoline, mortgage rates are very slow to come down, but they tend go up like a rocket – and with the surprising employment news today, we’ll probably get back into the mid-3s by Monday.  We’ll see if the lowest rates in history were the sole reason why showings rebounded so quickly. From cnbc:

What’s good news for the U.S. economy is suddenly bad news for mortgage rates. A far-better-than-expected May employment report only added to a growing sell-off in the bond market, pushing yields to the highest level since March. Mortgage rates loosely follow the yield on the 10-year Treasury.

Rates have been rising this week, after sitting around a record low for the last two weeks. Friday, the average mortgage shopper may see rates on the 30-year fixed as much as a quarter point higher, according to Matthew Graham, COO of Mortgage News Daily, which runs daily averages from lenders.

For those with top-tier credit and financials, they may only see an eighth of a point increase, but for those with lower scores and down payments, the jump could be as much as 0.375%.

“It’s going to be ugly,” said Graham. “Today is the first time since the Covid-19 market reaction settled down in March that interest rates truly have a reason to panic. Until further notice, this looks like liftoff.”

This is not, of course, the last word in a mortgage market that has been on a rate roller-coaster ride fueled by a massive spike in mortgage delinquencies, an initially confusing and risk-ridden government bailout, and an overstressed loan servicing system. The mortgage bailout has been clarified, with parts rewritten to help servicers, the number of borrowers in forbearance plans is shrinking and mortgage companies are on a massive hiring spree.

(more…)

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