Tag: Aaron Nawrocki

The Market in Focus: Removing Private Mortgage Insurance

Posted on by Aryne + Dulcinea
By Aaron Nawrocki, Capital M Lending

Removing Private Mortgage Insurance – The Latest Changes from Fannie Mae

As first time homebuyers re-entered the market after 2009, the percentage of mortgages with mortgage insurance increased. Mortgage insurance is an additional monthly cost that offsets the lender’s risk with down payments under 20%. Effectively, the mortgage insurance fills in the gap if the buyers’ down payment isn’t enough to protect the bank. If the lender forecloses and takes a loss through the foreclosure sale, they can make a claim on the mortgage insurance policy to offset their loss.

On conventional loans, borrowers can remove private mortgage insurance costs without refinancing. It’s a significant advantage versus FHA financing, where the mortgage insurance stays on for the life of the loan. Also, removing private mortgage insurance is typically much less costly than refinancing, and available even if interest rates are higher. However, the procedure for removing it has been unclear and not necessarily standardized across all lenders/loan servicers. In June, Fannie Mae published guidance for mortgage insurance removal.

If you’re currently paying private mortgage insurance on a conventional loan, take a look below. On all of the removal options, mortgage payments must be current and these procedures apply to owner-occupied homes.

Procedure for Automatic Termination of Conventional Mortgage Insurance – based on original value (78% rule)

  • Mortgage insurance must be automatically removed (no request necessary) on the date the principal balance is first scheduled to reach 78% of the original value of the property. For example:
    • Original purchase price of $400,000, mortgage insurance comes off when the loan balance reaches $312,000

Procedure for Borrower-Initiated Termination of Conventional Mortgage Insurance – based on original value (80% rule)

  • The borrower must initiate the request for removal
  • The lender must verify the value has not declined, using Fannie Mae’s servicing system or an appraisal
  • If the above criteria are satisfied mortgage insurance must be removed (no request necessary) on the date the principal balance is first scheduled to reach 80% of the original value of the property. For example:
    • Original purchase price of $400,000, mortgage insurance comes off via written request the loan balance reaches $320,000

The above have been pretty standard across the industry, but also less common. With values rising quickly, most borrowers would like to know how to use the new appraised value to document sufficient equity to remove mortgage insurance versus paying the mortgage down. Fannie’s new release clarifies the process that all servicers must use.

Procedure for Borrower-Initiated Termination of Conventional Mortgage Insurance – based on new market value

  • The borrower must initiate the request for removal
  • Must verify value via an appraisal or Broker Price Opinion, ordered through the loan servicer
  • The mortgage must have been in place for 24 months
    • If the mortgage has been in place for 61 months or more, the loan to value ratio must be under 75%
    • If the mortgage has been in place 25-60 months, the loan to value ratio must be under 80%

The typical cost of a Broker Price Opinion or appraisal is $250 – $450, so if you meet the above criteria, it can be a real value proposition to remove the mortgage insurance and lower your monthly payment.

If you still have questions about removing private mortgage insurance, I’m always happy to help – feel free to give me a call at 503-445-9525 if I can be of assistance!

 

Aaron Nawrocki has over 20 years of direct experience overseeing mortgage and loan processes, working to provide clients the market insight and lending expertise required to make informed decisions

 

About Us:
Over the course of their professional partnership, Aryne + Dulcinea have helped over 200 clients prosper in their new lives. During this time, they have prided themselves in their top-notch selling abilities, with homes outperforming market standards, consistently exceeding list price while most of their listings sell in under 7 days. Whether you’re looking to buy or sell, Aryne & Dulcinea will work in collaboration to guide you in investing in your future and reaching your real estate goals.

The Market in Focus: Non-Traditional Mortgages & Lending

Posted on by Aryne + Dulcinea
By Aaron Nawrocki, Capital M Lending

Across Oregon, and the Portland market in particular, there has been a wave of rising home values and declining affordability. Buyers face more challenges in qualifying, and higher mortgage payments are testing buyers’ monthly budgets. As in the past, lenders are coming up with non-traditional mortgages & lending solutions designed to help buyers qualify for more home, even if their tax returns or verifiable income do not support the mortgage payment. It should be noted that these programs to not help the buyers make the payment, just qualify for the larger mortgage. Sounds a lot like 2005, doesn’t it?

Currently, these mortgages represent a very small percentage of the total mortgages originated. They are also reported differently to regulators and subject to greater scrutiny. Although financial memories tend to be short, it seems unlikely that these loan products will lead to any type of 2008-style meltdown. They just aren’t that prevalent and are unlikely to become so. What’s more likely is that individual consumers will be harmed – and likely the most vulnerable. There’s a saying in financial circles that “rich people don’t buy lottery tickets.” That means that the folks taking the most risk are typically those that can least afford it.

In addition to the mortgage types mentioned above, there is a new product that claims to actually help homebuyers borrow more with a lower monthly payment. If you have a lot of equity in your home, you’ve likely received multiple mail solicitations offering a payout or “investment” in return for sharing in your home’s appreciation when you sell.  Typically, the “investor” is offering a cash payout of 10% – 25% of the value of your home and no monthly payment is required. That would put $25,000 – $60,000 in the pocket of the homeowner with no change in monthly cash flow. Because the payout is considered an investment in return for partial ownership rather than a loan, the transaction is not subject to the standard mortgage disclosures that protect consumers. I’ve read the actual paperwork and it is confusing.

No monthly payments sounds awesome. It should not be assumed that just because there are no monthly payments that this product is a low cost source of funds. The investor is repaid with a percentage of the value increase when the home is sold and shares in any loss if the value declines (subject to caveats). It’s typically 30-70% of the appreciation, which could make the effective annual cost as high as 20%. If my Dad wrote this article, he would say something like: “The time you pay the most is when you think you’re getting something for free.”

One of the only positive byproducts of the financial crisis was the standardization of mortgage products. Lenders are required to make sure that borrowers can pay back the mortgage and prepayment penalties are nearly outlawed. This has made it easier for borrowers to avoid catastrophic errors. As the market changes and non-traditional mortgages & lending options become more complex, it is important to make sure you understand everything you sign. Seek counsel from professionals you respect and choose a lender you know and trust. And if you get an offer that seems too good to be true – remember what my Dad says – it probably is.

Aaron Nawrocki has over 20 years of direct experience overseeing mortgage and loan processes, working to provide clients the market insight and lending expertise required to make informed decisions.

About Us:
Over the course of their professional partnership, Aryne + Dulcinea have helped over 200 clients prosper in their new lives. During this time, they have prided themselves in their top-notch selling abilities, with homes outperforming market standards, consistently exceeding list price while most of their listings sell in under 7 days. Whether you’re looking to buy or sell, Aryne & Dulcinea will work in collaboration to guide you in investing in your future and reaching your real estate goals.

The Market In Focus: New Rules for Removing Mortgage Insurance

Posted on by Aryne + Dulcinea
By Aaron Nawrocki, Capital M Lending

If you took a conventional mortgage out over two years ago and put less than 20% down – it could be a great time to look at lowering your mortgage payment by removing mortgage insurance. Mortgage insurance is in place to protect banks against loss should a mortgage go unpaid. Twenty-percent equity is typically required as a cushion in case of default, and mortgage insurances serves to make up the difference in cases of smaller down payments. This additional cost increases the overall monthly mortgage payment.

Historically, homeowners have removed mortgage insurance and lowered their monthly payments refinancing. Unfortunately, interest rates have risen over the last twelve months, making refinancing less cost-effective. The good news is that conventional mortgages allow homeowners to remove mortgage insurance without refinancing. They can deal directly with their current loan servicer and follow an administrative process to eliminate the monthly cost.

The challenge is that, while there were general guidelines that most banks followed, the requirements and method for removing mortgage insurance varied. If a mortgage loan was sold or transferred, the terms for taking off the mortgage insurance could change, making it difficult for lenders and homebuyers to plan for future removal. Fortunately, Fannie Mae developed rules for mortgage insurance removal which will apply across all loan servicers. These rules should make it easier for homeowners to reliably determine when they can lower their monthly payments.

Here are three ways for effectively removing mortgage insurance, assuming on-time payments for 24 months:

Automatic Termination – when the mortgage is paid down to 78% of the original value

  • If a homeowner pays his/her note down to 78% of the original value, the mortgage insurance terminates with no action required by the homeowner.
  • No fee can be charged by the servicer and the mortgage insurance must be removed on the date the principal balance of the mortgage loan is first scheduled to reach 78% of the original value of the property.

Requested Mortgage Insurance Termination Based on Original Value – when the mortgage is paid down to 80% of the original value

  • Once the principal balance reaches 80% of the original value of the property, the homeowner can request termination of the mortgage insurance – it doesn’t happen automatically.
  • The servicer is required to run the property through Fannie Mae’s Automated Valuation Model to confirm the value hasn’t declined. If the AVM doesn’t confirm the original value, the homeowner can order an appraisal through the servicer to confirm the value is the same or higher than when the loan was originally taken out.

Requested Mortgage Insurance Termination Based on Current Value – using an increase in appraised value.

  • Now it gets tricky. The biggest change is the quantification of how long the mortgage must be in place before a value increase can be used to remove mortgage insurance.
  • Homeowners can’t use market appreciation until a two-year payment history has been established.
  • If the mortgage has been in place less than two years, the increase in value must be supported by documentation of improvements.
  • If the mortgage has been in place between two and five years, the appraisal must document that the mortgage is no more than 75% of the appraised value.
  • If the mortgage has been in place over five years, the appraisal must document that the mortgage is no more than 75% of the appraised value.

With the way Portland values have risen in the last five years, it’s a great time to look at removing mortgage insurance to lower your mortgage payment. If any of the above scenarios fit your situation, reach out to your current mortgage servicer and ask them to send you their written procedure for its removal. If you have any questions, I’m always happy to help!

Aaron Nawrocki has over 20 years of direct experience overseeing mortgage and loan processes, working to provide clients the market insight and lending expertise required to make informed decisions.

 

About Us:
Over the course of their professional partnership, Aryne + Dulcinea have helped over 200 clients prosper in their new lives. During this time, they have prided themselves in their top-notch selling abilities, with homes outperforming market standards, consistently exceeding list price while most of their listings sell in under 7 days. Whether you’re looking to buy or sell, Aryne & Dulcinea will work in collaboration to guide you in investing in your future and reaching your real estate goals.

The Market In Focus: Cycle of Real Estate and FHA Financing – are we primed for a change?

Posted on by Aryne + Dulcinea

By Aaron Nawrocki, Capital M Lending

If you talk to Portland real estate agents these days, most will tell you we are seeing a sea change in the market. Buyers are pickier, listings are sitting longer and more transactions are terminating after inspections. Of course, some if this is completely normal – homes don’t typically sell in three days for full price. So what is the relationship between the cycle real estate and FHA Financing? With a rise in marketing times, inventory and FHA financing, the real estate cycle will likely experience a slowdown.

We’ve had an amazingly robust market, with Portland’s median price up over 45 percent from the bottom 8-10 years ago. It’s been a run fueled by strong economic growth, Portland’s livability and position as one of the more affordable west coast cities. The increased values were also supported by gradually loosening mortgage underwriting criteria that made it easier for homebuyers to get mortgages. Now, these looser criteria were nothing like what we saw in the early 2000’s. Income, assets and credit were all verified and loans originated from 2010 to today are performing very well.

What accounts for the market slowing, then? Is this a warning sign? Home prices have risen faster than incomes. In conjunction with higher interest rates, that makes homes less affordable. It’s just harder to buy a home with a comfortable monthly payment than it was 5 or 6 years ago. Much of the pool of well-qualified buyers already bought in the last eight years. There are fewer buyers, and those that remain often have higher debt to income ratios and lower credit scores. Overall credit quality is down and Fannie Mae and Freddie Mac are beginning to tighten up their guidelines to lower risk. Because it’s easier to qualify for an FHA mortgage, more buyers are using FHA financing. Here’s where there are some similarities with 2008; the rise in FHA loans was dramatic when the housing market cratered. Currently, FHA originations are 20% of new loans issued, vs the historical average of 9%.

Fannie Mae and Freddie Mac are chartered differently than FHA. They are tasked with providing liquidity, whereas FHA is chartered to raise the level of homeownership.  That means FHA is supposed to do riskier loans. They are supposed to step in and make loans when other entities will not. Nowhere was this more evident than when the bubble burst. FHA mortgages went from 3% of new purchase loans issued in 2007 to 28% of the market in 2009. FHA did exactly what they were supposed to do – when lenders were reluctant to originate new mortgages, FHA provided the guarantee that kept the real estate market going. Of course, the dramatic rise in FHA loans occurred after the market had crashed, not before.

So – we have sales slowing, affordability declining and FHA’s market share rising. Does this mean that the market has peaked and that we’re looking at a repeat of 2009? It makes for exciting articles on the internet, but probably not. We are all subject to a preference for recency, and when it takes more than a week to sell a home, it’s easy to jump ahead and assume the market is ready for a “correction”. The likely answer is that sales and price activity are within a healthy band. Within that band there are mini peaks and valleys that do not necessarily represent the beginning of a long term trend. Watch inventory – we’re currently at 3.9 months, underneath the 4 month average in the “boom” years from 2000 – 2005. For perspective, inventories peaked at over 10% in 2008. When we see a rise in marketing times, an increase in inventory and a rise in FHA financing, it’s likely there’s a trough coming in the real estate cycle. For now, expect slow growth and some stagnancy as sellers adjust to a more balanced market. It’s a great time to get advice from a trusted realtor, as we see well-marketed homes still moving quickly.

 

Aaron Nawrocki has over 20 years of direct experience overseeing mortgage and loan processes, working to provide clients the market insight and lending expertise required to make informed decisions.

About Us:
Over the course of their professional partnership, Aryne + Dulcinea have helped over 200 clients prosper in their new lives. During this time, they have prided themselves in their top-notch selling abilities, with homes outperforming market standards, consistently exceeding list price while most of their listings sell in under 7 days. Whether you’re looking to buy or sell, Aryne & Dulcinea will work in collaboration to guide you in investing in your future and reaching your real estate goals.

The Market in Focus: The Real Estate Cycle & Mortgage Fraud

Posted on by Aryne + Dulcinea

By Aaron Nawrocki, Capital M Lending

As interest rates rise slightly and price growth slows, we see the typical increase in all types of mortgage fraud. According to CoreLogic, aggregate fraud risk has risen each of the last six quarters. Outright forgery is still the most popular type of loan fraud. Occupancy fraud is next, followed by Identity theft.

Mortgage fraud typically rises in tandem with interest rates. Higher interest rates reduce the number of refinance transactions; they have a lower incidence of fraud. Purchase transactions are more likely to be fraudulent, buyers have an incentive to “push the envelope” as there’s more at stake. Higher interest rates and rising values also make qualification more difficult. Rising values bring in speculators hoping to buy and sell quickly for a profit.

This was especially true in the “boom” years of 2004-2006, when buyers wanted to buy as many properties as possible, for the largest profit. To buy more homes with less down payment, these buyers were guilty of occupancy-related mortgage fraud, using owner-occupied loans even though they had no intention of ever occupying them. These small down payment loans had higher monthly mortgage payments. When the market turned, the buyers were unable to make the payments and these speculative purchases were a high percentage of total foreclosures. Although these loans created enormous losses, there was very little enforcement. Often, it was challenging for lenders to access the data that would document the occupancy fraud and they frequently did not want to expose inadequate quality control policies that should have caught the fraud at application.

It will be interesting to see what enforcement looks like this time, when the market turns and defaults rise. Mortgage lenders, the FBI and the CFPB now have access to so much more data to document false applications. This has made identity theft and outright forgery much more difficult for fraudsters to execute. Lenders have sophisticated cross-referencing software that creates red flags when there are mismatches in identification data. However, because occupancy fraud is only committed after closing, it’s been more challenging for banks to track.

It’s now easy for banks to track and see if purchased home is occupied, referencing DMV records for change of address, utility bills, public record information for owner’s address, etc. If there are allegations of fraud or tax evasion, the IRS can share information about rental activity on Schedule E of the tax returns. This may create a different dynamic than in 2009, as a fraudulent application allows the lender to call the note due and begin foreclosure proceedings immediately, without having to follow the typical waiting periods.

Of course, when prices are rising and payments are being made, fraud is often concealed. When the market eventually turns and defaults rise, we’ll see whether lenders use anti-fraud tools to mitigate losses and collect more quickly. As Warren Buffett said, Only when the tide goes out do you discover who’s been swimming naked…

Aaron Nawrocki has over 20 years of direct experience overseeing mortgage and loan processes, working to provide clients the market insight and lending expertise required to make informed decisions.

 

About Us:
Over the course of their professional partnership, Aryne + Dulcinea have helped over 200 clients prosper in their new lives. During this time, they have prided themselves in their top-notch selling abilities, with homes outperforming market standards, consistently exceeding list price while most of their listings sell in under 7 days. Whether you’re looking to buy or sell, Aryne & Dulcinea will work in collaboration to guide you in investing in your future and reaching your real estate goals.

The Market in Focus: How Amazon and Zillow Mortgage Products May Impact Mortgage Prices

Posted on by Aryne + Dulcinea
By Aaron Nawrocki, Capital M Lending

What’s new in the mortgage business in 2018? More of the upward cycle in homebuying and competition for mortgage borrowers like we haven’t seen since 2006. After 10 years of fragmentation, big players are entering the mortgage space. Zillow is rolling out a mortgage provider to go with its real estate arm. Additionally, there are likely rumors that Amazon is working to build its own mortgage platform. Questions abound about what disruption Amazon and Zillow mortgage products may bring.

Historically, mortgages have been among the most regulated financial products. The government acts as a mortgage purchaser (Fannie Mae and Freddie Mac) and as a mortgage insurer (FHA). Along with their support for the mortgage industry comes a very specific set of rules for how mortgages can be originated -– we call this compliance– and an arcane set of rules that determine who gets a mortgage or not – called guidelines.

The “guideline” portion of the mortgage business – how loans are approved – could change with the arrival of these new players. Amazon and Zillow have both made a business of predicting consumer behavior by aggregating and analyzing data. It isn’t a big stretch to imagine them using that type of analysis to develop their own set of metrics for approving loans.

Compare how car loans are originated to how mortgage loans are underwritten and approved. Car loans are typically based on verbal information, heavily credit-based and approved in minutes. The value of the collateral (the car) is determined automatically based on a database of actual sales. The automated underwriting system amalgamates the credit, income and collateral data and analyzes it with an algorithm to determine if the loan will be approved. There is a wide spectrum of terms offered, based on risk. “good” loans get lower interest rates, “risky” but approved loans get higher interest rates.

Mortgage loan approvals are rule-driven – has the borrower been self-employed for two years, is the down payment borrowed, etc. There’s a loose correlation between meeting standardized underwriting criteria and loan performance, but at a micro level, loan decisions are not made based on how “good” a loan is. They’re made based on whether the right boxes are checked. While terms vary somewhat based on credit score, for the most part it’s a pass/fail system. It’s all very 1970.

With these new players entering the market, it’s possible that the next wave of change in the mortgage business will be to integrate big data and change the way mortgage loans are approved and priced. Amazon and Zillow mortgage products could mean quicker, easier loan approvals for the consumer. There would be a wider range of terms that more accurately reflects overall risk and makes mortgages available to riskier borrowers. It’s been just about long enough since 2009 for to see the business cycle open to change. The mortgage business has been among the most resistant to change – but five years ago, who thought you’d get into a stranger’s car instead of a taxi?

 

Aaron Nawrocki has over 20 years of direct experience overseeing mortgage and loan processes, working to provide clients the market insight and lending expertise required to make informed decisions.

 

About Us:
Over the course of their professional partnership, Aryne + Dulcinea have helped over 200 clients prosper in their new lives. During this time, they have prided themselves in their top-notch selling abilities, with homes outperforming market standards, consistently exceeding list price while most of their listings sell in under 7 days. Whether you’re looking to buy or sell, Aryne & Dulcinea will work in collaboration to guide you in investing in your future and reaching your real estate goals.

The Market in Focus: The Impact of Automation and Big Data on Mortgage Underwriting

Posted on by Aryne + Dulcinea
By Aaron Nawrocki, Capital M Lending

It’s hard to believe that 2008 was 10 years ago. Portland home values have risen dramatically since then and our real estate market is robust. In the mortgage industry, we are still dealing with the fallout from the bubble of the early 2000s, but the recent wave of new financial technology is showcasing the impact of automation and big data on mortgage underwriting

When default rates rose, investors (and Fannie Mae) rightly reexamined loans in their portfolios for fraud and errors. If they could document fraud or underwriting mistakes, they could force the lender to buy the mortgage loan back and avoid taking a loss themselves. Fraud, such as falsified income or asset documentation, was rare, but underwriting errors were more common. The error could be inaccurately calculated qualifying income, or something as simple as a mistyped street address on the appraisal. In difficult times, investors were looking for any reason to avoid a potential loss. This led to significant losses for lenders and structural changes in how loans were underwritten.

Changes in underwriting

If you took out a mortgage in 2010, you know the result – incredible scrutiny and conservatism. As lenders sought to eliminate errors and outright fraud, multiple levels of re-checking were introduced. Underwriters were verifying the source of $100 deposits, asking for multiple explanation letters – this often led to long loan processing times and missed closing dates. For the lenders, it led to dramatically higher costs. The extra people required to meet new regulatory requirements and avoid buybacks increased costs of production by up to 50%.

Income, assets and credit are relatively easy to quantify, and fewer of the buybacks were related to problems in that area. Appraisals involve more judgment on the part of the appraiser and are more of a gray area. Lenders have less control over the appraisal process and were naturally concerned about exposure in another downturn. Fannie Mae and other investors fear overvaluations and errors that could lead to more losses in another downturn.

Big data to the rescue

Beginning in 2010, FNMA introduced a uniform data set for appraisals, allowing them to build a super database of property sales. From here, we began to see the the impact of automation and big data on mortgage underwriting processes. Every Fannie Mae loan’s appraisal becomes a part of this data set. Their automated system, Collateral Underwriter, is an audit checker that reconciles individual appraisals to the data set and checks it for validity and potential errors. Once the appraisal has been through this filter successfully, the lender is no longer responsible for the appraisal’s accuracy. In essence, FNMA is validating the appraisal to reduce their own risk, and the lender gets relief from future liability.

Beginning in 2016, Fannie Mae introduced a system for direct verification of income and assets. Rather than getting the income and asset information from the borrower and then validating it, FNMA now offers a system of automated income and asset validation. The borrowers’ employment and asset information are input and through Fannie’s automated underwriting process, employment and assets are verified directly with the employer and bank. This is the basis of Rocket MortgageTMand other automated systems. Currently, the system will only work on a small percentage of mortgage applications. Not all employers subscribe to the employment database FNMA uses and not all banks offer direct verification. There’s also some consumer resistance (due to privacy issues) to allowing lenders to gather information from buyers’ employers and banks directly.

For now, most mortgages are closed with direct, personal involvement of underwriters, document drawers and quality control personnel. While limited data access has prevented a sea change in the mortgage process, most lenders utilize automated validation systems to reduce fraud, errors, cost and expense. These processes are mostly invisible to borrowers, but do contribute to a smoother, quicker loan process. Will we see a time when all data is aggregated electronically and mortgages close in two weeks? Probably not – the history of the mortgage business is one of pendular changes between efficiency and losses. We’re currently swinging from triple checking everything to making the process easier and cheaper. We won’t know if this is the right path until the next crash – but the impact of automation and big data on mortgage underwriting underscore the importance of transparency. For now, look forward to a smoother, quicker, more reliable process, but keep your paystubs handy, just in case.

 

Aaron Nawrocki has over 20 years of direct experience overseeing mortgage and loan processes, working to provide clients the market insight and lending expertise required to make informed decisions.

 

About Us:
Over the course of their professional partnership, Aryne + Dulcinea have helped over 200 clients prosper in their new lives. During this time, they have prided themselves in their top-notch selling abilities, with homes outperforming market standards, consistently exceeding list price while most of their listings sell in under 7 days. Whether you’re looking to buy or sell, Aryne & Dulcinea will work in collaboration to guide you in investing in your future and reaching your real estate goals.

The Market in Focus: Higher Portland Home Prices, Smaller Down Payments

Posted on by Aryne + Dulcinea

By Aaron Nawrocki, Capital M Lending

Portland home prices have been climbing consistently this decade, and there’s a lot of “bubble” talk these days. If you had to name the two defining changes in the Portland mortgage market over the last eight years, they would be higher sales prices and smaller down payments. Portland has traditionally had a strong real estate market, even in downturns, but Portland down payment amounts are decreasing. Historically, sales prices and loan amounts rose in lockstep. As Portlanders moved up, they took the equity from their sale and put it down on the new purchase. Portland incomes have traditionally been lower than other places on the west coast and Portlanders needed lower monthly payments. Larger down payments kept the monthly payment affordable and limited the growth in prices.

Now that Portland is the it city on the west coast, the connection between down payment and sales price has changed. More buyers are moving here from other locations, bringing their well-paying jobs with them. They’re younger, make more money, can afford higher monthly mortgage payments, and are putting less down. Accelerating the shifting dynamic is the increasing availability of small down payments paired with large loan amount mortgage. This trend has pundits worried we may be headed for trouble. Small down payments mean banks have a smaller cushion in case of default, and a moderate price decrease would leave more homeowners under water. That makes defaults more likely, as homeowners are less likely to continue making mortgage payments when they owe more than their home is worth. In the last recession, many at-risk homeowners elected to stop making payments, and the flood of foreclosures created a downward market spiral. It’s understandable that analysts would make the connection between 2006’s peak and the recent price runup.

The rate of price increase is similar – the early 2000s and recent years have seen strong price growth, which raises concerns of a correction. However, while the price increase is similar, there are two factors which make a bubble less likely.

  • Rents have risen along with sales prices. That makes elective defaults less attractive. In 2009, a homeowner might abandon their home and its $2,000 per month payment and rent a similar home for $1,500. Today’s housing market is different – rents and monthly mortgage payments are similar. Therefore, homeowners typically can’t reduce their housing expense by opting to rent.
  • Mortgage qualification is dramatically different. The biggest change is the absolute requirement to verify the buyer has the means to repay the mortgage note. In 2006, buyers could easily get a mortgage to buy a new home without having to document they could afford the payment. There was no validation by the bank, allowing many buyers to make speculative purchases. As soon as the market turned even slightly, many of these buyers could not make their monthly payments and allowed their homes to go into foreclosure. While a price decline will increase defaults in today’s housing market, ensuring the monthly payment is truly affordable will mitigate this effect.

There’s an old saying that whatever goes up, must come down. That’s as true today as ever. The rapid rise in Portland home prices definitely feels evocative of the early 2000s and brings up the specter of a bubble. Prices will eventually decrease, of course, but unfortunately no one knows when. The good news is that the structural and mortgage changes in the real estate market will likely dampen the severity of the market’s ebbs and flows. With the strong inflow of well-qualified buyers in the Portland market, it appears that Portland home prices are set for a period of stable growth.

 

Aaron Nawrocki has over 20 years of direct experience overseeing mortgage and loan processes, working to provide clients the market insight and lending expertise required to make informed decisions.

 

About Us:
Over the course of their professional partnership, Aryne + Dulcinea have helped over 200 clients prosper in their new lives. During this time, they have prided themselves in their top-notch selling abilities, with homes outperforming market standards, consistently exceeding list price while most of their listings sell in under 7 days. Whether you’re looking to buy or sell, Aryne & Dulcinea will work in collaboration to guide you in investing in your future and reaching your real estate goals.

The Market in Focus: Lower Interest Rates Coming for Low-Risk Borrowers?

Posted on by Aryne + Dulcinea

By Aaron Nawrocki, Capital M Lending

For many years, all eligible borrowers received the same interest rate. In essence, there was one base interest rate, and if your mortgage was approved, that’s the rate you got. While it may not have been perfectly equitable, it certainly made it easy for lenders to quote interest rates and for buyers to understand. However, the development of big-data and risk assessment platforms, lower interest rates may be attainable for low-risk borrowers.

In 2008, Fannie Mae (FNMA) and Freddie Mac (FHLMC) added interest rate adjustments for different loan characteristics. After the government-sponsored enterprises (GSE) went into receivership, they examined their portfolio and its performance, adding extra charges to their base rate for factors such as:

– Lower credit scores
– Using a concurrent second mortgage (combo loans)
– Type of refinance transaction (cash out refinances)
– Down payment percentages

The idea was that the above factors affected risk – e.g. lower credit score loans would default more frequently. Consequently, borrowers with fewer risk factors are more likely to get lower interest rates than their counterparts. Raising the cost for higher risk loans would better connect a mortgage’s risk to its cost. It’s analogous to car insurance – if a driver has a few tickets, the cost of insurance is naturally higher as the insurance company is more likely to suffer a loss.

The adjustments to rate put in place in 2008 (and adjusted thereafter) are constant across all lenders for conforming loans, as they’re established by FNMA/FHLMC. Here’s where it gets interesting. Fannie and Freddie back tested their tweaks in 2014 to see if the interest rate adjustments accurately reflected the loss ratios based on loan characteristics. What they found is that they overestimated the loss ratio for high credit score borrowers and underestimated the loss ratio for low credit score borrowers. In other words, “risky” borrowers were getting a better deal than “premium” borrowers. To think of it in health insurance terms, the healthy were paying for the sick.

Markets have a way of evolving in response to information and big data is a buzzword we see all over these days. As mortgage banks (and FNMA/FHLMC) build deeper databases and connect loan characteristics to loss rates, expect to see more complex pricing. There will likely be a greater range of interest rates offered, with larger discounts for higher credit scores and larger down payments. Banks and buyers will adapt to these changes and they’ll become part of the marketplace. For buyers, it means that keeping credit scores as high as possible will be more important in securing lower interest rates. Credit scores will be examined in an upcoming column and I’m always available to answer and financing questions you may have. To learn more about current real estate trends, or to speak with a real estate specialist about buying or selling a property, contact Aryne + Dulcinea. Their expertise in today’s market will ensure you have an optimal experience during your next real estate venture.

 

Aaron Nawrocki has over 20 years of direct experience overseeing mortgage and loan processes, working to provide clients the market insight and lending expertise required to make informed decisions.

 

About Us:
Over the course of their professional partnership, Aryne + Dulcinea have helped over 200 clients prosper in their new lives. During this time, they have prided themselves in their top-notch selling abilities, with homes outperforming market standards, consistently exceeding list price while most of their listings sell in under 7 days. Whether you’re looking to buy or sell, Aryne & Dulcinea will work in collaboration to guide you in investing in your future and reaching your real estate goals.

The Market in Focus: Interest Rates & the Portland Housing Market

Posted on by Aryne + Dulcinea

By Aaron Nawrocki, Capital M Lending

It’s been an exciting 2018 so far in the stock and bond markets. The broad indices are down over 10% from their peaks. Treasury Bond and mortgage rates are at a four-year high. It may be a good time not to look at your 401k statements, but what about the effect on home prices and the Portland housing market?

Higher interest rates make homes more costly, even if prices don’t rise. The higher cost of borrowing generally slows price increases. If we looked back over the last 20 years, we’d see a general correlation between rates rising and prices stalling. Mortgage interest rates are up about .5% over the last month, and for the average Portland homebuyer that means an increase in monthly payment of about $150. That’s enough to slow appreciation down somewhat and that’s exactly what the Fed hopes to accomplish with their rate increases.

Is it the second coming of 2009? Not likely. Interestingly enough, a moderate increase in borrowing cost can slow price increases, but rarely does it dramatically slow the market. Buying a home is a serious decision and typically the largest single financial transaction a family will make. Most buyers make the decision to buy a home based on their financial prospects and choose the price based on the monthly payment. So, interest rates don’t necessarily keep folks from buying, but they do affect the price they are willing to pay. We have a growing economy with a shrinking middle class (that’s a discussion for another day) and many Americans feel confident about their jobs and prospects. That confidence is what make buyers feel comfortable about buying homes (and is much more important than interest rates in the buying decision.) We learned this during the recession. Lower interest rates and lower mortgage payments don’t bring buyers in from the sidelines if they are worried about their jobs.

As the Fed works to smooth out and proactively dampen the economic cycle, watch for a brief slowdown while buyers and sellers receive and react to rates. Once the new normal for interest rates is accepted by the Portland housing market, it’s likely we’ll see buyers continue to enter the market. Portland is a desirable destination and still affordable for many potential homebuyers. We’ll see if the rate changes are a correction or a sign of things to come. For now we expect robust sales and a healthy market balanced between buyers and sellers.

 

Aaron Nawrocki has over 20 years of direct experience overseeing mortgage and loan processes, working to provide clients the market insight and lending expertise required to make informed decisions.

 

About Us:
Over the course of their professional partnership, Aryne + Dulcinea have helped over 200 clients prosper in their new lives. During this time, they have prided themselves in their top-notch selling abilities, with homes outperforming market standards, consistently exceeding list price while most of their listings sell in under 7 days. Whether you’re looking to buy or sell, Aryne & Dulcinea will work in collaboration to guide you in investing in your future and reaching your real estate goals.