The Veridian Blog

Even though last week was shortened by the Thanksgiving holiday, there were signs that the bond markets and hence mortgage rates are appearing jumpy and may be poised for a nosedive sometime this week.  Global equity markets were hit hard while we took time out to prepare our sumptuous feasts and Friday was indicative of a reactionary sell-off in stocks.  Trading was light, however, so it remains to be seen this week how markets will follow through.  Many mortgage products continue to flirt or have surpassed all time lows – it is nearly comical how low these rates are falling as the benchmark 10-year note hit 3.20% last week.  This upcoming week will culminate in November’s Employment report.  Current forecasts call for no change in the unemployment rate of 10.2% with payrolls down 114,000.

Home Sales data and the GDP report will headline this holiday-shortened week but there are also potential market moving reports due out during the first three days.  Volatility will be high but we do not expect rates to budge much from the new lows they hit last week. 

This morning, a better-than-average auction of 2-year Treasuries has helped the bond market to recover earlier losses sustained as a result of strength in stocks and higher-than-expected Existing Home Sales for October.  The benchmark 10-year note currently stands at 3.40%.

Mortgage rates continue to match or set new record lows.  The traditional conforming 5/1 ARM is at an eye-popping rate of 3.50% for zero points (with fees) or 3.75% for no point or fees!  Other restrictions apply.  Call us for more details!

The American Recovery and Reinvestment Act of 2009 increased the maximum allowable amount of conventional loans that are salable to Fannie Mae to $729,750 in the Bay Area.  This increased the limit from $625,500 placed into effect in the first part of 2009 via the Housing Recovery Act of 2008 and from $417,000 which is the maximum “traditional” conforming limit. 

On October 30^th, the House and Senate moved quickly to pass an extension of the $729,750 GSE (Government Sponsored Entities – Fannie Mae and Freddie Mac) loan limit, hoping to avoid any potential disruption in the mortgage market.  Both chambers cleared the loan limit extension as part of a continuing funding resolution.  President Obama is expected to sign the continuing resolution shortly.  The maximum $729,750 loan limit for Fannie Mae, Freddie Mac and Federal Housing Administration loans in high cost areas were set to expire on December 31, 2009.  Without the new law, the high-cost loan limit would have fallen back to $625,500.  The continuing resolution extends the higher loan limits through December 31, 2010.  The new law also extends the nationwide $625,500 loan limit for FHA-insured reverse mortgages through December 2010.

"Given the lack of a private secondary mortgage market, FHA, Fannie Mae and Freddie Mac are pretty much the only game in town," said Robert Story, chairman of the Mortgage Bankers Association.  "Extending the current loan limits, along with other initiatives will help restore stability to the housing and mortgage markets."  VA loans were not included in the extension.  The Department of Veterans Affairs already has the authority to guarantee single-family loans with a maximum loan balance of $729,750 through December 31, 2011.

The new legislation, albeit late in the year, does not come as a total surprise.  Given the weakened state of the housing market and overall economic climate, we feel that the expiration of these limits would have certainly placed unwelcome drag on economic recovery.  It would have been an opportunity taken away from many homeowners trying to take advantage of historically low mortgage rates.

Many clients of ours have recently discovered the harsh truth that their homes may not be valued as high as they once thought.  When borrowers are in the middle of a refinance transaction and they suddenly discover that their Loan-to-Value (LTV) ratio is above the standard 80% maximum allowable for loans, what options do they have?

This scenario is all too common these days as appraiser independence is as pure as ever due to the newly effective Home Valuation Code of Conduct (HVCC).  Appraisers have no incentive to keep lenders and borrowers happy and are instead ultra-conservative in hopes of avoiding underwriting scrutiny.  As a result, home values are now often surprisingly lower than what the borrower expects putting them in a position to make uncomfortable choices.  Here’s what they can opt to do:

1.      Pay down the balance

A tough pill to swallow in the current “cash-is-king” economy.  The amount of cash needed and the interest rate savings are the primary factors in selecting this choice.

2.      Dispute the appraised value 

Since inception of the HVCC, we’ve tried a handful of times but to no avail.  It requires more resources to find and submit supporting comps for a higher value and possibly a second appraisal report.  Even with reports laden with errors, we have yet to successfully change an initial value.  Appraisers apparently see no reason to budge.

3.      Find a “Refi Plus” program

The initial qualifying factor is that the borrower's existing loan must be owned by Fannie Mae.  If so, then they are definitely in luck because as long as the Loan-to-Value ratio is still less than 90%, then their rate will likely be the same as if were under 80%!  No time in the history of mortgage programs has this been possible!  Some conditions apply, but for garden-variety owner-occupied loans, this has been quite the savior program for many homeowners.

4.      Continue and pay PMI

Borrowers really need to have a compelling reason to continue with the loan and pay PMI.  The cost of the insurance is exorbitant and recurring.  Also note that PMI is not even allowed on high-balance conforming loans. 

5.      Wait

If none of the first four choices are likely, then borrowers must wait until they accumulate funds for the pay down, for favorable legislation to pass, or for home values to rise.  During this time, they will have to hope that rates stay low.

Most refinance candidates these days are choosing to pay down if they cannot qualify for Refi Plus.  The main reason is that mortgage rates are absolutely sizzling right now and it’s not easy for homeowners to pass on these great interest rates.