The Veridian Blog

Our best 30-year mortgage program hit an all-time low of 4.75% this morning (no points, no fees) for conforming loans of $417,000, as momentum from yesterday's Fed announcement has carried over into today. 

Before contacting us, please note that wholesale lender turn-around times were already long prior to Wendesday but now we are anticipating these estimates to double very quickly based on what happened last November and early January this year.  This creates a Catch-22 situation for almost all files that need to be approved before being eligible to lock-in on the best rates. 

In other words, get your file in ASAP and hope rates stay the same or better by the time you receive approval.  We, as well as the wholesalers, have limited scalability so the sooner the better.  Every day delayed may result in a 3, 4 or 5 day delay in the loan process.  We thank you in advance for your infinite patience as we strive to navigate through these unprecedented times in the lending industry.

http://finance.yahoo.com/news/Bonds-surge-after-Feds-cnnm-14681345.html

What this means to the mortgage markets:

The initial reaction is extremely positive and aggressive, particularly for traditional conforming loans of $417,000 or less.  Similar to the situation last November when the Fed made a surprise announcement of its support of Fannie Mae, rates tumbled quickly and swiftly.  We'll see how long it lasts.  If you have been waiting on the sidelines, please send in your paperwork asap - the underwriting queues were already long and now lenders will be flooded again.  Thanks in advance for your patience while we navigate through these unprecedented times...

Thanks!

R

Citigroup reported what is known as a profit during the first two months of the year – a condition where your revenues actually exceed your expenses and losses.  This helped ignite the stock market into a huge 4-day rally on Wall Street.  All jest aside, traders finally got some relief in both the stock and bond arenas after Citigroup, and two reports from Retail Sales and Consumer Confidence that were not as poor as expected.  We were apparently at the point where any non-devastating news is good news and that proved to be the case last week.  J

It’s a big report week with PPI and CPI due out, followed by Jobless claims on Thursday.  Presently, the benchmark 10-year note is a little up, yield at 2.96%....

In these trying economic times, should you pay down your mortgage balance instead of falling victim to the equity markets?

More than ever, “cash is king”.  We have always advocated the strategy to keep your cash and NOT pay down your mortgage for three reasons:

1.      Rate of return*– Mortgages are still the cheapest source of financing in the world – why not take advantage of this and allocate elsewhere the cash that would have otherwise been used to purchase the home?  The subject home will appreciate over time whether or not there is a mortgage lien on the property.  Paying down a 7% mortgage means you need a rate of return around the same to break even, right?  Not at all – with long-term investments, you have the advantage of the power of compounding, whereas your debt does not (making it more “attractive” debt).  For example, a 5% return on $100 over 10 years yields $162, not $150 – all the while your debt payment stays the same.  So to break even on the debt interest, the rate of return would actually only be less than 7% paid on a mortgage.  But wait… there’s more good news…

2.      Taxes – “Good” mortgage debt is an itemized deduction for taxpayers at their highest federal tax bracket, ranging upwards to 38% of ordinary income while long-term federal capital gains tax is as little as 15%.  Why not maximize tax-advantageous debt and tax-friendly gains?  This further emphasizes allocating money elsewhere – even some long-term CD’s today will beat out what you have to pay on after-tax mortgage debt!  

3.      Liquidity – It’s certainly easy to put cash into a home, or pay down a mortgage.  But what if you need it back?  Selling a house during a housing downturn or applying for a cash-out loan are both unfortunate situations borne out of poor financial planning.  Ironically, many people rationalize that they need a lower mortgage payment just in case they lose their jobs.  But, what happens if they do lose their jobs or the house depreciates and they need cash?  This is a situation that in recent years would have been laughed off but has now become a sad reality for many.  They can’t get a decent loan!!!  Real estate is an illiquid asset and that fact should be a huge consideration when deciding how much to borrow.

*This article was written initially 3 years ago and while liquidity is clearly a compelling reason to refrain from putting cash into your home, we also steadfastly stand by the Rate of Return reason despite the recent collapse in equities.  When considering this analysis, the comparison of strategies is over a long-term period to allow for fluctuations in the market.  Understandably, things wouldn’t sit well for a homeowner who invested in the S&P 500 instead of paying down their mortgage.  However, remember that investing is a periodic, long-term, disciplined approach.  While that homeowner has lost half his capital since October, the strategy is to continue investing during the valleys as well as the peaks.  Over time, we strongly advocate that this strategy prevails. 

For more details or further discussion, please email us!

Richard

Today, the Obama administration launched what it calls the “Making Home Affordable” initiative.  Borrowers will have to provide their most recent tax return and two pay stubs, as well as an “affidavit of financial hardship” to qualify for the $75 billion loan modification program, which runs through 2012.
Borrowers are only allowed to have their loans modified once, and the program only applies for loans made on Jan. 1 2009 or earlier. Up to 4 million borrowers are expected to qualify. Mortgages for single-family properties that have balances that exceed $729,750 are excluded.

The new Freddie Mac Relief Refinance Mortgage is designed to assist borrowers who are current on their mortgage payments but who would benefit from refinancing into mortgages with terms that better position them for long-term homeownership.  To qualify, borrowers must have mortgages that are owned or guaranteed by Freddie Mac.

Eligible borrowers can use Relief Refinance Mortgages to improve their position for long term homeownership success by reducing their current mortgage interest rate or shortening the amortization term.  Similarly, the Relief Refinance Mortgage can be used to replace an adjustable rate mortgage, an interest-only mortgage or balloon/reset mortgage with a 15-, 20- or 30-year fixed-rate mortgage. 

The loan-to-value ratio on Relief Refinance Mortgages can be as high as 105 percent of the property's value.  There is no maximum combined LTV ratio, however Relief Refinance Mortgages cannot be used to payoff or reduce subordinate liens.  What's more, existing liens must continue to be subordinate to the Relief Refinance Mortgages.

Borrowers interested in learning more about the Freddie Mac Relief Refinance Mortgage or the Home Affordable Modification program should contact their mortgage servicer.  Borrowers should also contact their servicer to find out if Freddie Mac owns or guarantees their mortgage.