I recently read an article titled “Fannie and Freddie must go – here’s how”.  The authors are Richard Kovacevich, retired Chairman & CEO of Wells Fargo and William Isaac, Global Head of Financial Institutions at FTI Consulting and former Chairman of the FDIC.  Below are the main points of the article.  Read them and you decide if this will benefit the Honolulu real estate market.

Background
The recession of 2008, precipitated by the collapse of the subprime mortgage bubble, may be over, but America’s economic growth is weak.  The housing market must be strengthened.  Yet in the past three years, there has been no progress on the housing front and Washington policymakers seem clueless as to how to turn things around.

Congress wants to raise mortgage fees charged by Fannie Mae/Freddie Mac to pay for the payroll tax extension. Some lawmakers assert this will eventually lead to getting the government out of the mortgage business.  It’s unclear how increasing fees charged by Fannie/Freddie encourage the government to wind down these agencies.  Raising mortgage fees during the worst housing slump since the Great Depression will not stimulate housing or job creation.

Subprime mortgages have existed for decades, but they were well under 10% of the mortgage market until Fannie/Freddie reduced credit standards to meet low-income and minority home ownership targets mandated by Congress.  By 2007, nearly 50% of U.S. mortgages were subprime and Fannie/Freddie guaranteed about 70% of them.

Bank regulators warned Congress for decades about Fannie/Freddie’s risky portfolios, but those warnings were ignored.  Without government guarantees, the subprime bubble and the resulting financial crisis probably would not have happened.  Since Congress failed to act, nearly the entire developed world is suffering from the mortgage-induced recession and U.S. taxpayers are on the hook for hundreds of billions of dollars of losses at Fannie/Freddie.

Steps to Mortgage Reform
The solution is straightforward:  The public/private hybrid of Fannie/Freddie should be abolished, their existing business sold or liquidated and the mortgage market privatized.  This can be done in an orderly way in a few easy steps.

• Fannie/Freddie’s existing portfolio of mortgages should be sold at a rate of about $75 billion a year until it reaches zero.
• The current $625,500 limit on new mortgages guaranteed by Fannie/Freddie should be reduced by $100,000 per year, to ensure both agencies are out of the guarantee business within six years.
• The liability for any outstanding guarantees should be managed by the current government conservatorship of Fannie/Freddie until they run off or are sold.
• If the government still wants to provide mortgages for low-income families or minorities, it should be on budget and be transparent.  The Federal Housing Authority already exists to do this.

Some say this puts the American home ownership dream at risk.  Consider this; the United States is the only major country in the world where the government is heavily involved in the mortgage market.  Yet, the home ownership percentage in the U.S. is less than two percent higher than most developed countries and countries like Canada have higher percentages than the U.S.

Some speculate that mortgage rates would skyrocket and the 30-year, fixed-rate mortgage would cease to exist without Fannie/Freddie.  However, non-conventional or “jumbo” 30-year mortgages not guaranteed by Fannie/Freddie have existed for decades.

In the decade preceding the financial crisis, the interest rate on these jumbo non-conventional mortgages averaged just 0.25% higher than similar guaranteed mortgages.  That’s just over $40 a month on a $200,000 mortgage.  Shouldn’t Americans, like homeowners throughout the world, pay an extra tax-deductible $40 per month so taxpayers aren’t on the hook for hundreds of billions to bail out Fannie/Freddie?

It’s time for Congress to do what it should have done decades ago; get the government out of the mortgage business so taxpayers are never at risk again.

1.  Bank of Hawaii will now finance Ko’olani using conforming (Fannie Mae) rates vice of portfolio loan rates.  This lowers the rate by 0.5%.

2.  Central Pacific HomeLoans is able to provide mortgage loans for Moana Pacific apartments, despite the ongoing developer vs. Association of Apartment Owners litigation.

3.  A little late, but better than never; Bank of Hawaii is financing purchases of Pacifica Honolulu apartments.

If you’re considering a home purchase/sale or if you need a referral to a great mortgage lender, please contact Michael Zimmerman.

]]> http://michael-zimmerman.com/2011/09/21/kakaako-condo-mortgage-news/feed/ 0 http://michael-zimmerman.com/2011/07/20/government-shutdown-and-the-impact-on-mortgages/ http://michael-zimmerman.com/2011/07/20/government-shutdown-and-the-impact-on-mortgages/#comments Wed, 20 Jul 2011 10:20:45 +0000 Michael Zimmerman http://michael-zimmerman.com/?p=4970 Continue reading Government Shutdown and the Impact on Mortgages]]>

I recently read an article detailing how the mortgage industry may be affected by a Government shutdown.  The article listed the following areas that may be impacted:

1.  FHA loans requires an FHA case number and this number is needed before an appraisal can be ordered.  Since appraisals cannot be ordered, FHA loans may be delayed during a shutdown.  VA loans would be delayed for the same reason.

2.  Each loan requires verification of at least one tax return by the IRS to verify the numbers that each loan applicant presents on their tax returns.  During a shutdown, this process would be delayed as IRS employees wouldn’t be at work to verify the transcripts.

3.  Verification of Employment is necessary to gain loan approval.  If the customer is a federal government employee, lenders would be unable to verify his or her employment during a shutdown.

4.  Homes located in a flood zone would not be able to close on time as flood insurance could not be obtained during a shutdown.

5.  USDA loans would be delayed since the USDA office would be closed.  USDA has government underwriters that insure these loans.

]]> http://michael-zimmerman.com/2011/07/20/government-shutdown-and-the-impact-on-mortgages/feed/ 0 http://michael-zimmerman.com/2011/01/22/mortgage-trends-in-2011/ http://michael-zimmerman.com/2011/01/22/mortgage-trends-in-2011/#comments Sat, 22 Jan 2011 10:22:29 +0000 Michael Zimmerman http://michael-zimmerman.com/?p=4234 Continue reading Mortgage Trends in 2011]]>

I read an article written for Investorpedia in early January.  Here are the highlights:

1.  The Mortgage Bankers Association (MBA) anticipates rates will rise slightly in 2011, hovering around 5% and increasing to 6% in 2012.  At the end of 2010, mortgage rates left the low 4% range and began to approach 5%.  Any increase in mortgage rates is unwelcome to buyers and those who want to refinance, but 5% is still historically very low.

2.  The MBA predicts total mortgage originations for 2011 will decline, driven by slow economic growth and a lack of consumer confidence.

3.  Refinancing accounted for about 80% of all mortgages written in 2010.  The MBA predicts that refinancing activity will drop below 40% of mortgages in 2011 and decline further to 26% of mortgages in 2012.  The pool of qualified homeowners will shrink as mortgage rates rise.

4.  The MBA predicts stabilizing home prices and modest increases in home sales will increase the number of applications for a mortgage for home purchases.

5.  In 2009 and in early 2010, jumbo loan mortgage rates (loans over $417,000 in most housing markets and above $625,500 in Hawaii) were much higher than conforming loan mortgage rates.  The higher rates prevented homeowners from refinancing and kept some purchasers of more expensive homes out of the market.  In the fourth quarter of 2010, jumbo loan mortgage rates decreased, which may spur refinancing applications and purchase applications for the high-end housing market.

6.  Lawrence Yun, chief economist of the National Association of Realtors, reported that all-cash purchases represented about 25% of all existing home purchases in the last four months of 2010.  He expects all-cash purchases will continue to represent a significant portion of the market in 2011.

7.  Even if the number of loan applications drop, lenders anticipate the time to close will continue to take as long as 60 days.  The increased level of documentation and verification required to obtain loan approval is a huge issue.

While these general mortgage trends may impact the real estate market overall, each homeowner or buyer considering applying for a mortgage should meet with their lender to determine the cost and availability of a loan that meets their needs.  If you’d like a free consultation or referral to a great mortgage professional, please contact Michael Zimmerman.

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Fannie Mae recently published the key findings of its 2010 Own-Rent Analysis.

Some high points:

• Fifty-one percent of those surveyed reported the housing crisis has not affected their overall willingness to buy a home
• The housing crisis has had the greatest impact on younger Americans.  Since the housing crisis, homeownership for those 25 to 29 years old has declined 10 percent since peak rates, compared with a decline of 5 percent among those 35 to 44 and less for those 45 and older.
• The substantial majority of homeowners (89 percent), as well as nearly half of renters (44 percent), believe they would be better off owning their homes, given their current financial situations
• Eighty percent of Americans would prefer to live in a neighborhood where most people own their homes
• Fifty-two percent of renters do not have good enough credit to obtain a mortgage
• Married couples are 2.5 times more likely to own than others

]]> http://michael-zimmerman.com/2011/01/07/fnma-own-rent-analysis/feed/ 0 http://michael-zimmerman.com/2010/10/15/mortgage-programs-continue-to-change/ http://michael-zimmerman.com/2010/10/15/mortgage-programs-continue-to-change/#comments Fri, 15 Oct 2010 10:15:33 +0000 Michael Zimmerman http://zimmerman.realty-buzz.com/?p=3638 Continue reading Mortgage Programs Continue to Change]]>

I recently attended a mortgage seminar sponsored by Pacific Access Mortgage.  Here are a few important takeaways:

FHA – Good news is the upfront mortgage insurance premium just decreased from 2.25% to 1%.  The bad news is the monthly mortgage insurance premium increased to .85% (for down payments of 5% or more) and .9% (down payments less than 5%).

USDA (Rural Housing) – This is one of the few programs with zero down payment requirements.  The Guarantee Fee was recently increased to 3.5% from 2%.  In addition, the USDA is rezoning eligible areas in 2011.  Current eligible areas including Makakilo, Ewa Beach and Kapolei may no longer be eligible for USDA loans.

Flood Zones – Flood zone changes are coming to Oahu January 19, 2011.  This means some homes may now require flood insurance and others already in flood zones may be reclassified to higher risk zones.  Check your home’s flood zone with the Flood Hazard Assessment Tool.

]]> http://michael-zimmerman.com/2010/10/15/mortgage-programs-continue-to-change/feed/ 0 http://michael-zimmerman.com/2010/10/02/mortgage-rates-at-record-lows/ http://michael-zimmerman.com/2010/10/02/mortgage-rates-at-record-lows/#comments Sat, 02 Oct 2010 10:02:52 +0000 Michael Zimmerman http://zimmerman.realty-buzz.com/?p=3541 Continue reading Mortgage Rates at Record Lows]]>

Freddie Mac reported the average rate for 30-year fixed rate mortgages fell to 4.32%, matching the lowest on records dating back to 1971.  The 15-year fixed rate mortgage average fell to 3.75%, the lowest on records dating back to 1991.

In recent weeks, U.S. Treasury yields dipped as bond traders anticipated the Federal Reserve will increase its Treasury purchases to boost the economy.  Mortgage rates tend to track Treasury yields.

To the Obama administration’s dismay, historic low rates have failed to lift the struggling housing market, which had its worst summer in more than a decade.  Fall home sales are not expected to be much better as high unemployment keeps people from buying homes.  Worse, many of the hardest-hit markets are bracing for another wave of foreclosures and short sales.

Rates on 5-year adjustable-rate mortgages averaged 3.52% and 1-year adjustable-rate mortgages rose to an average of 3.48%.

The reported average rates do not include add-on fees known as points.  The average fee for loans in Freddie Mac’s survey averaged 0.8 a point for 30-year mortgages, 0.7 of a point for 15-year and 1-year mortgages and 0.6 of a point for 5-year mortgages.

]]> http://michael-zimmerman.com/2010/10/02/mortgage-rates-at-record-lows/feed/ 0 http://michael-zimmerman.com/2010/08/24/one-credit-report-is-not-enough/ http://michael-zimmerman.com/2010/08/24/one-credit-report-is-not-enough/#comments Tue, 24 Aug 2010 10:24:49 +0000 Michael Zimmerman http://zimmerman.realty-buzz.com/?p=3422 Continue reading One Credit Report is Not Enough]]>

Fannie Mae recently instructed lenders to adopt a new policy that includes a second review of an applicant’s credit report just prior to closing.  The reason is simple:  the credit profile of a borrower may have changed between the time of the initial credit report review and the closing date.

How will this impact the home loan?

The potential impact to a borrower who utilized credit to make significant purchases after the initial credit report may include the following:

• delay in closing
• increase of closing costs and/or interest rate
• a decreased loan amount
• denial of the loan

In the worst-case scenario, a change in credit may result in a loan being denied, even after an original approval was granted.

What should homebuyers do (or avoid)?

During the application process, borrowers should use credit sparingly and make sure they adhere to the tips provided below by credit expert Linda Ferrari of Credit Resource Corp:

• don’t do anything that causes a red flag to be raised by the scoring system
• don’t apply for new credit of any kind
• don’t pay off collections or charge offs
• don’t max out or over charge on your credit accounts
• don’t consolidate debt onto one or two credit cards

This list is not comprehensive, but it gives you an idea of situations that may create issues and may also be contrary to some ideas you have read previously.  Be sure to consult your mortgage professional if you have any questions or doubts.

]]> http://michael-zimmerman.com/2010/08/24/one-credit-report-is-not-enough/feed/ 0 http://michael-zimmerman.com/2010/08/09/how-the-stock-and-bond-markets-drive-home-loan-rates/ http://michael-zimmerman.com/2010/08/09/how-the-stock-and-bond-markets-drive-home-loan-rates/#comments Mon, 09 Aug 2010 10:09:45 +0000 Michael Zimmerman http://zimmerman.realty-buzz.com/?p=3407 Continue reading How the Stock and Bond Markets Drive Home Loan Rates]]>

The stock and bond markets have their own special relationship.  Often, while one moves higher, the other moves lower.

Poor economic news normally causes money to flow out of stocks and into bonds because investors see bonds as a safer investment when the economy is weak.  An increased demand for bonds drives bond prices higher, as with any item when there is heavy demand for it.  When bond prices move higher, bond yields (and consequently home loan rates) move lower.  So any movement of money into bonds typically helps home loan rates improve.

Conversely, strong economic news normally has the opposite effect.  When the economy appears strong, investors transfer money to stocks, hoping to take advantage of increasing stock prices.  Often this money is pulled out of bonds.  In turn, this causes bond prices to fall and home loan rates to rise.

]]> http://michael-zimmerman.com/2010/08/09/how-the-stock-and-bond-markets-drive-home-loan-rates/feed/ 0 http://michael-zimmerman.com/2010/05/25/the-appraisal-is-a-vital-part-of-the-lending-process/ http://michael-zimmerman.com/2010/05/25/the-appraisal-is-a-vital-part-of-the-lending-process/#comments Tue, 25 May 2010 10:25:10 +0000 Michael Zimmerman http://zimmerman.realty-buzz.com/?p=2972 Continue reading The Appraisal is a Vital Part of the Lending Process]]>

What is a real estate appraisal?
It is an expert, unbiased opinion of the market value of real property.  The appraiser performs a detailed site inspection which includes visiting the property, recording room measurements and noting amenity information.  Since no two properties are identical, an appraiser considers the property location, comparable sales in the area, floor plan sketches and local building costs and labor rates.

Why get an appraisal?
If you’re financing your property purchase, the lender requires it.  The lender wants to ensure the property is worth what a buyer has agreed to pay for it since the lender, more often than not, is putting in three or four times as much cash as the buyer at the time of purchase.  The lender wants to take prudent risks.

What if the appraisal value is less than the purchase contract price?
This occurs more than it used to and can derail the buyer’s home purchase.  The lender will finance less than the buyer expected which means the buyer, if he/she still wants the property, needs to put in more cash than originally expected to complete the purchase.

A real life example:
A buyer agreed to purchase a Honolulu condominium for $500,000.  Let’s say the lender will finance up to 80% of the purchase.  That means the buyer will provide a $100,000 down payment and finance the remaining $400,000.  What if the appraised value is only $480,000?  The lender will finance 80%, or $384,000.  That means the buyer needs to contribute $116,000 as the down payment instead of $100,000.  Some buyers can manage this; others cannot.

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